Indeed live-boot uses squashed filesystems (sfs) and overlays. Main read only sfs at the bottom, a rw save area on top. Looks down and if the file is in the save area then that is used, otherwise reads from the ro sfs. whiteout files (.wh) are used to indicate if a file has been deleted i.e. still in the bottom ro, but if a .wh file exists in the save area that indicates the file isn't available.
Gets more interesting if you use lz4 for the sfs compression. Its multi core decompression speeds can approach ram bus speeds. Most sfs's however are commonly compressed with gzip.
My secondary boot is
EasyOS. In that you boot the main sfs (with its own save area, Debian live-boot tends to use a save partition as the save area, however more generally that can alternatively be a folder). Then you can create a chroot container. Normally you load/setup a chroot with a os within that, however in EasyOS's case that's just a pointer ... to the same sfs that the main system booted from. That chroot then has its own separate save area. Fundamentally in EasyOS it uses the main sfs at the bottom layer, its own save folder area, and sets up a Xephyr desktop that along with chroot and dropping capabilities ...etc makes that 'container' relatively secure and isolated from the main system. This for instance is my EasyOS desktop container that I run firefox ...etc within
ps provides a indication of the limitations i.e. PID 1 is a script. Whilst I run as root within that container, root is severely crippled to the extent it comparable to a heavily restricted userid. To mount things for example I have to flip from that to a more authoritative userid/desktop/tty.
Another benefit is that you can create snapshots of the container i.e. save the save area to a sfs - which is just the list of changes. And then roll back or forward between snapshots (i.e. restore the save area from a particular snapshot sfs to the save area).
sfs's are a interesting subject to become familiar with. When I ran Debian as my primary boot I used to do a full install, and the install live-boot on top of that, with a empty main sfs. Label the main (full install) as 'persistence' and that becomes the live-boots save area. That way you can live boot, do things and then not save at the end, so no changes are preserved. Great for trying things out. Or for updating just normal (full main system/standard) boot and apply the updates (apt-get update). Best of both worlds.