It explains exactly how it will work. They generate a tiny placeholder app package to replace the application itself on-device.

This way it frees up the space used by the application data, without removing it altogether, so that the associated user data can still remain with it.

It’s the same concept as iOS’ feature to offload unused apps, but this appears to be implemented in a way that is backwards compatible with older devices since the Play Store is able to manage the process of replacing and restoring the app package and not the core OS.