Just briefly browsing the source this is a much more minimal version of VS code--many of the extensions microsoft packages and ships aren't in it. I don't doubt that helps reduce the JS bundle significantly and as a result gives you much speedier loading times. For example there's no terminal or any of its extensions in this version of VS code.

Right. That can be done because this is specifically only for reading code with a VSCode interface.

Codespaces gives you a VM in which you can debug your application, but this service does not appear to do that.

Monaco is just the extensible text editor, right? Nothing else, I thought.