There is a .vscode folder in the repository, suggesting they might not be eating their own dog food yet but are actually using VS Code to develop Theia.
Also, Theia indeed uses the Monaco editor, and various other open-source components also found in VS Code. The developers of Theia and VS Code actually collaborate on these.
And finally, Theia fully supports VS Code extensions. There is even an effort to make this IDE extension format an open standard: https://open-vsx.org