I'm pretty sure they are updating it with a file called oddupd.xex in the sys update file , I haven't looked in any other system updates so i don't know if that is a standard file or not , their are 3 of them oddupd1 , 2 ,3 respectably. Xextool reports it as a DLL , I think i saw a reference to it in the install_extender.xex i'll have to take another look.
Seems like they are updating them to conform to their new disc standard. Whatever it is they are doing , it doesn't appear to be related to stopping mass piracy or unflashing your modded drives , just updating the drives FW to conform.
In another thread we are discussing this same issue , apparently if you have a modified FW on your drive the system update will fail , and if you flash back to stock then run the update it will work and flash your drive and you can then dump it and flash it again. It also appears to fail if you have no drive in at all , or a drive with the wrong key.
@Ranger - if you are unable to dump the FW after it's been updated through the system update then apparently whatever hole was open to get the fw without a hardware hack has been closed , or just another software method will need to be found. It seems the old 360s can just be reflashed so this must be related to the new slim drives.