A lbry-format file is a compressed web site, much like a zip file. More specifically, it's a directory of files individually zipped with Zstandard, then collected into a tar archive.
It is recognized and launched by the LBRY-desktop app to enable rich, interactive media in the client.
When the LBRY desktop app encounters the .lbry extension, and the user presses "play," it decompresses the .lbry file, launches a sandboxed web server in the background, and 'serves up' this file like a real web server might.
This enables a lot of possibilities. To see what is currently possible with this format, check out the LBRY channel [@OpenSourceGames](https://open.lbry.io/@OpenSourceGames#e8fed337dc4ee260f4bcfa6d24ae1e4dd75c2fb3).