No. Coffeescript is not going to be run inside the rails stack. That would be controversial.

All that's happening is by default the scaffolding generator scripts will spit out boilerplate coffeescript rather then boilerplate javascript.

All that's needed to change back is to comment out a single, clearly marked line of code.

The coffee-script gem (https://github.com/josh/ruby-coffee-script) uses ExecJS (https://github.com/sstephenson/execjs) to invoke the CS compiler. Rails 3.1's asset pipelining system will use these gems by way of Sprockets 2 (https://github.com/sstephenson/sprockets) to compile and serve CoffeeScript to the browser.

If you're on Windows or Mac OS, ExecJS will use the JS runtime already installed on your system (Windows Script Host or Apple JavaScriptCore). You can also install a gem like therubyracer (V8 for MRI, available on Heroku) or therubyrhino (Rhino for JRuby) for faster compilation. And ExecJS can use Node.js or Spidermonkey if they're installed too.

CoffeeScript isn't interpreted; it's not its own language. You write CoffeeScript code, which resembles simplified and cleaned-up Javascript, and then run a parser over it which converts it to standard Javascript.

You'll need CoffeeScript (gem) installed in this situation, but that's just another Rails dependency.

EDIT: I should point out that Rails will use CoffeeScript for client-side (browser) code, not server-side code. That remains Ruby and associated DSLs.