alt Hacker NewsBut the extension doesn't need to use that exact mechanism, and the person that linked it didn't mention specific mechanisms. The purpose of the extension is putting the real URLs back, and it can still do that.
And it can still prevent google from knowing which search results you click on, even though OP didn't mention that feature.
You can read the extension source, and description. It is obvious that what it does is strip url parameters and decode well known google encodings.