When the compressed image files are downloaded they are normally stored in a location on your / partition inside the snap. However if you set storage.images_volume then these compressed files will be stored in the custom volume you specify. This can prevent the / partition be filled up with downloaded images.
Then when you create an instance from one of those images, if the storage pool being used supports efficient snapshots, then first the compressed image file is unpacked into an “image volume” on the storage pool in question.
Then the instance being launched is created by taking a snapshot of that image volume, and subsequent instances created from that image are also created as snapshots from that image volume.
In this way multiple instances do not need to duplicate the base image file contents repeatedly.