I wasn't familiar with the term, so I just searched the phrase "residential proxies", and the space seems even more sketchy than the usual VPN peddlers who promise the world and more. Are they using malware-infected PCs, or what?

The most legit ones use their own users (to access the residential proxy you have to agree to become an endpoint yourself).

More shady but probably legal ones use JavaScript and Apps that typically hide the fact you are becoming an endpoint in the T&Vs.

Straight up illegal ones use compromised computers and routers like you'd think.

Some of them use the endpoints using their app. Which means a lot of people become the spammers just by joining the network. Of course it's mentioned in the middle of their T&C, but who reads that...

I’ve always been curious how the residential proxies work. Is someone going around paying people to run proxies in their home? Are these compromised devices being exploited? Are there a bunch of storage units someplace with cable service? The mind runs wild.