XWayland is not a backend per se, ie. you don't run Weston "on" this backend. Instead, as you say, this module listens for applications launched in Weston that try to connect to an X server, and if they do (if it's an old program written specifically for X), then Weston launches an X server, and takes the buffer that the application sends to this spawned X server and displays it as any other application running under Weston.
Looks like this: http://i.imgur.com/lvUbYIb.png
Here you have Google Chrome, gedit, gnome-control-center, gnome-font-viewer, smuxi, synaptic and gnome-terminal running as XWayland clients inside Weston.