How is that different from sharding into mini 20 player servers? I was hoping for 1000 players all in visual range :)
Eve Online record is >6000 players all in visual range, but they cheat by lowering server tick from 1Hz down to 0.1Hz https://wiki.eveuniversity.org/Time_dilation
AgentK20 explained the technical bits along with the other reply to you, but basically the "actually all in one world" is the big part. For sharding you're handing players off to different instances. With Folia someone can just walk from one person to another without any issue or lag.
Folia dynamically groups people into regions depending on their distance. So it was designed to have people spread out to be able to support many regions across many threads. You can put 1000 people in one spot, it just gets very unhappy and you're now not really taking advantage of the whole point of Folia.
It's not a solution for every server or person but it's definitely cool because it's another tool in the Minecraft tool box. And the API is very similar to Paper, whereas the sharded options start to get kinda tricky quickly.
[Speculation, I don't have the data and wasn't involved in the test] The test placed each 'team' 10240 blocks apart, which is close enough for a ~30 minute walk to get to another team (~4 minutes if you take the nether), so I assume a lot of bubble merging/splitting happened. It's also far enough away that, if the regionizing logic allows for it, you're split off onto another thread relatively early into your journey to visit another 'team' spawnpoint. This is a relatively realistic scenario for an SMP, where towns are usually 2,000 to 20,000 blocks apart.
And inevitably, people still find them, usually through advanced techniques -- hacks that tell you whether a chunk is newly generated or part of an existing 'chunk trail' can be used to hunt down players that have taken great effort to hide their location.
Anyways, a distance of 10240 is just how this particular test was set up. The regionizing is still useful in a much cozier world. As I understand the only way for it to be guaranteed that everyone is inside the same bubble (and therefore the ticking is all on a single thread) is for everyone to be in the same 768 block radius, or for there to be a line of players spaced this distance apart. It's rather atypical for a server to organically develop this way, since people really like to explore for hours before settling in the perfect spot. But some heavily planned/curated server are like this.
EDIT: Correction, as doctor_phil points out that's a quadratic scale not an exponential scale. Derp.
A small correction - Folia regions are not Minecraft regions. They don't necessarily align with the 512x512 region grid, and can take different shapes and sizes depending on what the regionizing algorithm is doing. The term "bubble" is used in some of the documentation and may be a more accurate description.