That generally requires config on the serving hosts, which wasn't mentioned in the setup. I think I saw a reference to adding hosts with a different port number than the service port as well. For people in EC2-VPC (not classic), all their traffic is going through an Amazon NAT anyway, perhaps this new service is setting up translations there. (Note all the references to VPC, and never a mention of EC2-classic)

Direct Server Return works at layer 3 not layer 2, its routing and encapsulation - IP in IP, GRE etc.

You can do it at layer 2 as well, but it requires that the load balancer have an interface on the same broadcast domains as the hosts.

I am confused at how this would work. Can you elaborate? Also broadcast domain is a layer 3 construct.