For the most part, it doesn't. All it stores are the master file, and then a list of changes/edits. So you can take an original photo, make several versions of it all with different adjustments (say one black and white, one cropped, etc) and it does not triple the space required. It just stores your edits for each version. It does create a preview (if you have it enabled, which you probably do) or each version for sharing with iLife and such.
It's actually fairly space efficient.