I have no idea how it works either, but it seems to work fine on the same partition. Apparently ecryptfs uses a sort of filesystem-within-a-filesystem approach to encrypting areas of a partition, rather than the entire partition. The only downside to disk encryption in general is that (for me at least) you get noticeably slower access speeds, and you're screwed if something goes wrong.
When I used /home directory encryption, it worked flawlessly.
