Can anybody explain what the lag compensation is doing?

There is no such thing as lah compensation. Lichess doesn’t care about your lag.
He timed out and had two more sec cuz YOU were lagging and it took longer for the move to register.

https://lichess.org/lag

Having a higher lag is an huge advantage in ultra-/hyper-/bullet. The best country/vpn for lag is somthing like india (e.g. top ultraplayers Nihal and Arjun). Everything above 50-100 is already lag which matters in fast time controls.

@HyperCloxy No, it is not. Amazing, how many people are willing to believe that lichess added a feature to make things unfair ...

The effect of an opponent's clock appears to jump backwards is probably in most cases an effect of lag, and not of lag compensation.

Try to make yourself clear: You do not see your opponents clock. It is impossible, and lag wouldn't be a problem at all, if it was possible.
What you see instead is a simulation of your opponent's clock. You see what your device believes, your opponent's clock could be showing. This simulation is correct as long as it is in sync with the true clock, but whenever your opponents makes his move, your device is informed about it with a delay (which we call lag). And during this delay, your device shows you an untrue state of the other's clock.
And not before the info about this event arrives at your device, it can correct its simulation, and start to show you the truth.

So, lag alone - without any compensation - can explain the effect of opponents seemingly becoming time gifted.

Do not discuss about wether having higher lag is an advantage in ultra or not is an advantage or not when you have never played Ultrabullet @sheckley666. Lichess added this future to make even short time controls playable for players from all over the world. Read this posts first:

1. lichess.org/forum/lichess-feedback/the-problem-that-never-dies?page=1
2. lichess.org/forum/general-chess-discussion/prevent-lag-compensation-at-ultra-and-hyper-bullet-games?page=1
3. lichess.org/forum/lichess-feedback/lag-compensation-is-a-joke-and-whoever-is-responsible-for-implementing-it-should-be-fired#7
4. lichess.org/forum/lichess-feedback/where-is-the-setting-to-remove-the-lag-compensation?page=1
5. lichess.org/forum/general-chess-discussion/disable-lag-compensation-in-ultra?page=1
6. lichess.org/forum/team-umutcrazy-fun-club/umutcrazy-lag-handling#2
7. lichess.org/forum/lichess-feedback/is-it-possible-to-avoid-playing-with-laggers#1
8. lichess.org/forum/general-chess-discussion/lagger-cheater#1
9. lichess.org/forum/lichess-feedback/filtering-by-connection#1
10. lichess.org/forum/general-chess-discussion/very-many-laggers-in-bullet#1
11. lichess.org/forum/general-chess-discussion/stupid-question-about-servers#8
12. lichess.org/forum/general-chess-discussion/lag-compensation-in-bullet-stop-penalizing-players-with-good-connection#1
13. lichess.org/forum/general-chess-discussion/ultrabullet-laggers--please-fix-this-lichess#1
14. lichess.org/forum/lichess-feedback/lag--lagging#1
15. lichess.org/forum/lichess-feedback/stop-help-lagging-players-to-win-in-ultrabullet?page=1
16. lichess.org/forum/lichess-feedback/the-average-lag-of-an-opponent-must-be-shown-in-the-game#6
17. lichess.org/forum/lichess-feedback/tired-of-these-stupid-laggers#4

and then talk again about whether lag is an advantage or not in ultra...

Do not set preconditions for what I am allowed to discuss, @HyperCloxy
I read most of these unfounded claims, and found none of them convincing. The problem of all these people is that they make an observation, and draw a wrong conclusion from it. I don't deny the observations, therefore it is unimportant if I have myself any experience in fast time controls. I disagree with the explanation and gave a better one.

Bro, I talked to lichess mods as well about this issue and they agreed that it is an advantage in ultra to have a higher lag but they don't change it because they do not know how... I do not think that you have a better knowledge about how lag compensation works than lichess mods. @sheckley666