X11 selection transfers (which both PRIMARY and CLIPBOARD are instances of) are done through synthesized X11 events and properties changes.
The messages used to transfer the selections have a maximum size that's actually quite low (a few kilobytes).
The xclipboard command emulates the traditional Macintosh style clipboard by claiming ownership of the CLIPBOARD selection and answering any requests for its value. When it loses the selection, it immediately asks the new owner for the value of the CLIPBOARD selection, makes a local copy, and then reasserts ownership of the CLIPBOARD. This way the clipboard contents can persist after the original application has exited.