The update system in LibreELEC supports updating both from a tar file and and img.gz one - you can just copy it into the .update folder, reboot, and it'll get picked up.
The /storage (ext4/linux) partition is unchanged, the updater will only replace files in the /flash (vfat/windows) partition.
The difference between the tar file and the img.gz file is that the tar file contains the files that need to be updated in /flash in a more suitable format. The img.gz is a compressed raw disk image with a 512MB vfat partition and an empty ext4 partition that will get resized when first booted. When updating with it this image file needs to be uncompressed first and then scanned for partitions to get to the actual files in the vfat partition.
So, while both variants work and have the same end result, doing that with an img.gz takes longer (due to the uncompressing overhead).
so long,
Hias