To ensure games run well on Linux either via Native Linux builds or Windows games with Proton, part of the magic is in the Steam Linux Runtime. A new version of it, the Steam Linux Runtime 4.0 was recently put up with some pretty big changes.
What’s the point of it? It ensures Steam and games run through Steam on Linux work properly across all the many different Linux distributions. Another secret Valve sauce for Linux. Well, not secret at all but you get my meaning I’m sure.
No, it is a per game setting. When your game is a native Linux game it will use one of the Steam runtimes. If you had a Linux native game and selected Proton instead of a Steam Linux runtime Steam would download the Windows version of the game.
With Linux native games you usually don’t have to touch this setting.