It’s a hybrid software, hardware approach. It seems they anticipated the compatibility issues from the outset. Per Ask the Developer (Link): I’m sure that those who already own Nintendo Switch games will be delighted that they can play them on Nintendo Switch 2. Did you already decide on this functionality when you were first planning the development of a new dedicated game system? Kawamoto …

https://forum.beyond3d.com/threads/nintendo-switch-2.64001/page-2