Something completely different.
Ars Technica's Lion Review goes into this in detail. (See Here)
Basically it chunks files, looks for chunks that differ, and stores those in an SQLite database. (CoreData uses SQLite) A separate DB is used for tracking all the different revisions and which chunks go with which revisions.
The engine that handles the chunking is semi-intelligent too. It can crack some file formats (e.g. JPEG images, PDF files, MPEG audio/video files, etc.) and separate out the various blocks within, then look for changes within those. That prevents a change in a video header from generating a cascade of changes that bloats the delta storage unnecessarily.
Also of note: An app that wants to use this versioning system must be written to do so. It's not automagic by default, nor is every file on the filesystem versioned in with this framework.
One thing I've thought of that I haven't yet seen addressed: Is it possible to "pin" particular versions of files? The Ars review indicates that Lion's gernerational storage framework automatically ages out old revisions. Is there a way to tell the OS that a particular version is important enough to keep indefinitely?