Lightroom is able to write the changes to a sidecar file (XMP) which it does during times of low load, or demand.
Lightroom itself does not refer to these XMP files.
Lightroom works from its Catalog, which is really a Database with all the information about every image you import, including the location of that image.
When you work on a photo Lightroom accesses both the Catalog file AND the original file AND any preview files it may have generated for that image (the location of which are also stored in the database catalog).
The Catalog and Previews have to be stored together on the same drive, that also needs to be a local drive. But you can store images pretty much where every you like, including on a network drive.
Putting the Catalog and Previews on a separate drive to the images shows a noticeable increase in performance.
If that drive is an SSD, then in theory, and from what people are saying, the performance is even better.
Using XMP or DNG should have no impact on performance, as the updates are done only when the drive and LR are not busy, and they are small and make very little demand of system resources.