This features allows you to mount an .iso or .img image file just like any physical media. This could be useful, for example, to keep a GNU/Linux distro for recovery purpose inside an encrypted partition.
Due to limitations in GRUB file search capabilities the image filename must be a number from zero to the list_devices variable maximum value. The number inside the filename will represent the loopback slot assigned to that image so care must be taken in order not to allow multiple medias to have very same filename.
The files (like 0.iso, 1.img and so on) must be placed on the root directory of the media. Do not also use different extensions with same filename.