I'll butt in again. Not
voxels.
Metavoxels. If you've ever worked with Lightwave, you know what the "meta" prefix means in this case - like metaspheres and metaedges, metavoxels keep their original meaning (a visual point in space), but gain parameters upon which surrounding geometry will be created. If you pay close attention, you'll see that the landscape in LoU is entirely polygonal. This is because these "voxels" are now used as merely reference points in space from which a polygonal mesh of the terrain is created. Instead of denoting each and every vertex in a wavy column's mesh and storing that in memory, the landscape engine simply creates a string of voxels, each containing its position, and three parameters - the index of the brush type, the size of said brush, and the texture used. It will likely optimize every "brushstroke", to avoid excessive memory usage when lots of strokes are made in the same general area. Then, whenever the engine needs to display, or otherwise use the terrain around the edited area, it will generate the required mesh on the fly. It's a pretty ingenious system, and if it's pulled off right, it will be extremely flexible without being too taxing on the hardware. Of course, physics are an eternal issue here, but setting up conditional responses to "hanging" parts should be no harder with metavoxels than it is with cellular terrain (not much anyway), and many games of this "fight build craft explore" type, like Minecraft and Terraria, can do very well even without something as simple as that.
Of course, everything I said about the engine may be completely inaccurate as far as this particular game is concerned - I am mostly describing a hypothetical metavoxel engine similar in function to GeoMod, which would look similar to what the videos for the game depict. On how this game works, anyone's guess is as good as mine.