I'm not super adcanced in it and you beter off referring to NixOS docs to learn about it specifically, but trying to answer your question, it creates symbolic links of libs or binaries and manipulates PATH, LD_PATH and others. Some packages will also have speciall wrapper scripts that prepare the environment for a binary to run.

The downside is that you can't just run Linux binary directly when it's dynamically linked and you need to use what's in the repo or use special overlay to imitate FHS