In practice
What it looks like in the app.
In the timeline, you see beautifully-rendered posts and probably don't think about why. The em dashes look like em dashes. The quotes are curly. The whitespace is right. You might notice, once, that posts in Lanai look better than the same posts elsewhere. You probably don't notice why.
In settings, there's a section called Typographic touch-ups with three options — All touch-ups (Tiers 0–3), Just display fixes (Tiers 0–2), None (Tier 0 only). Default is All touch-ups.
In a long-press menu on any post, there's Show original. You can verify, copy, or just see.
Settings · Display
Typographic touch-ups
Default · All
Lanai applies small typographic improvements when displaying posts — curly quotes instead of straight ones, em dashes instead of double hyphens, that kind of thing. The original post is never changed, only how it appears here.