What it does is take the Intel code to be run on an M1 and translates it from Intel to ARM code, before the code is going to be run. Neither is it an emulator, which provides a virtual processor and is normally painfully slow, as we experienced with PC emulators on PowerMacs in the past. Rosetta isn’t a Virtual Machine (VM), which merely provides a layer to work between different operating systems, and can’t run across different processor architectures.
(The original Rosetta had the same task during the transition to Intel.) It’s temporary in the sense that there will come a time when support for Rosetta 2 will be discontinued.
If M1 Macs could only run apps built for its ARM cores, then they’d have a limited market, so Apple has engineered a temporary solution branded as Rosetta 2. The eight cores inside an M1 can’t run code which has been compiled for Intel processors, because the instructions (and more) are different. The most fundamental difference between an M1 Mac and all the previous Macs, since they switched to using Intel in 2006, is the processor.
