It appears this mechanism uses https://vscode.dev to facilitate the tunnel – all the data likely travels through there as well. This might be handy if your machine was behind a firewall where you could not directly access via ssh.
VSCode also supports remote editing over ssh:
If your machine was behind a firewall, then you could use wireguard/tailscale to gain ssh access and accomplish what the new VSCode tunnel allows. In reality, you’ll likely need ssh access anyway to start the tunnel.
This is still of marginal interest to me as I still run Neovim in Tmux in a terminal, so I can easily run that over a remote ssh connection. I have mixed feelings about the fancy features in VSCode like auto complete, etc – in some ways it can be a crutch and not really a bottleneck in my development. It can also be distracting if you always have stuff popping up all over the place as you are typing. One of the best programmers I ever worked with used a simple text editor without any syntax highlighting. Tools can only complement, but never fully replace skill.
There are people who have set Neovim up with most of the same features as VSCode using the VSCode language servers, but I’ve not bothered to do this yet. I probably will at some point, but this is not the main bottleneck for me getting things done right now.