You’re pretty close. It just backs up everything every hour, meaning hard links for everything, but only copies the data (and points the hard link to it) if the file has changed or is new. Otherwise, the hard link points to the last previous backup. That’s how it looks like you’re looking at your whole file system. As you know, Spotlight keeps track of all your files for searching, but Time Machine also leverages Spotlight to find out which files have changed or been added. Ars Technica had a very in-depth article on this a while back. I can dig it up if you want.
I just did a search. Is it this one?
Could it be improved in the future by doing backups at the block-level rather than the file-level? Yes, that would be good for very large files. But in the meantime, this is a great backup system with easy setup, use, and great interface.
Time Machine is great. And no doubt it will only get better in the future.