LBX works by introducing a proxy server at the client side, which performs caching and compression. The X server knows that the client is using a proxy server, and decompresses accordingly.
Here's a normal setup for remote X clients. In our discussion, LOCAL is always the workstation sitting in front of you, whose monitor you're looking at, and REMOTE is the remote workstation, where the actual application is running.
REMOTE LOCAL
+-----+ +-----+
| APP |-\ Network +----------+ | |\
+-----+ \--------------------------->| X SERVER |=>| ||
+-----+ / (X Protocol) +----------+ +-----+\
| APP |-/ /_____//
+-----+
When using LBX, a proxy server (lbxproxy) is introduced on the
remote side, and the applications talk to that process instead of
directly to the LOCAL server. That process then performs the caching
and compression of X requests and forwards them. It looks like this:
REMOTE LOCAL
+-----+
+-----+ +-------+ Network +----------+ | |\
| APP |->| PROXY |----------------------------->| X SERVER |=>| ||
+-----+ +-------+ (LBX/X Protocol) +----------+ +-----+\
+-----+ / /_____//
| APP |--/
+-----+
Details on exactly what caching and compression LBX does is beyond the scope of this document.