Windows 3.x could also run in “standard mode”, where it used a 16-bit only DPMI server. The Windows GUI system could run in real mode or as a DPMI client.
As far as “nested virtualisation”… Windows 3.1’s DOS windows could actually in turn run more instances of Windows 3.1, because Windows/386 relied on virtual 8086 mode only and Windows 3.x used DPMI which can be nested.
The former's VMM and VxDs were largely a superset of the latter's. The only real trick is that there was a secret handshake between the DOS program WIN and the Windows KRNL386 program that has to be satisfied by whatever tries to start it in that second VM, otherwise KRNL386 just exits immediately. One cannot use WIN to start KRNL386 in the second VM. WIN does too much other than running KRNL386. It has to be something else that does the secret handshake and only tries to run KRNL386.