If I remember correctly when you version a table and make an edit. It adds those changes to the managed delta tables. So all adds and deletes are tracked in those tables. Each edit then moves the database to a new state further down the tree. So the underlying base state is unchanged and the edits in the delta tables are applied to those features to see the current database state.
Eventually that state tree will get very long and is the reason to compress it. it will prune all the trees and move those edits to the base state and start over.
With the option to move edits to the base selected basically means it will handle the reconcile and posting automatically for you.
Here is an excellent versioning whitepaper with more information than you would ever care to know.
http://downloads.esri.com/support/whitepapers/ao_/Versioning_2.pdf