There is a .vscode folder in the repository, suggesting they might not be eating their own dog food yet but are actually using VS Code to develop Theia.
Or, possibly, that Theia is based on VSCode and uses the same config files. I haven’t had a chance to try it yet (though I am interested!) but it looks like a fork of VSCode visually: That certainly looks like Monaco editor and somewhat similar to VSCode as a whole, down to apparently being compatible with its extensions.
You're 100% correct, Theia supports configuration via a .vscode/ directory, because that seems to be a "standard" way to configure your IDE. (Before you jump, yes it also supports EditorConfig).
Also, Theia indeed uses the Monaco editor, and various other open-source components also found in VS Code. The developers of Theia and VS Code actually collaborate on these.
And finally, Theia fully supports VS Code extensions. There is even an effort to make this IDE extension format an open standard: https://open-vsx.org
Thanks for showing me OpenVSX, I am now really invested in checking out Theia! Going to be a real game changer for me if I can self-host this, will try it out in Docker ASAP.