Author here. It was done with a Python script that parses the CSS into a stream of characters annotated with metadata saying whether the character is allowed to be escaped and whether whitespace can be inserted before or after it. It's then just a matter of breaking up the stream where whitespace is permitted and using the escaping to pad segments to the exact size required.
Definitely not recommended in production. Other than the obvious inefficiency, it was only supported in Chrome fairly recently (even though the CSS escaping rules have remained largely unchanged for 20 years or so). In this case, though, the game itself depended on recent bug fixes in Chrome, so there wasn't much point in worrying about compatibility with older versions.
Bear in mind that the whole point of this exercise was to produce a game without using any JavaScript whatsoever. It was intended to be more of a technology demonstration than a playable game. As the article pointed out, you can find a much more accurate and playable implementation of the game on the Pica Pic website. http://pica-pic.com/
That explains that it's not 'garbage' but it doesn't explain why hn isn't doing something a bit nicer than hosing the Unicode version. As another commenter pointed out, even just displaying both would probably be an improvement.
I get the feeling HN needs something of a rewrite for better Unicode support in general, based solely on the ways I've seen it strip Unicode from comments.
I also believe that a something better than the status quo is possible. Perhaps render the URL correctly then display the obfuscated URL beside it in between parentheses.
International domain names will never be used if browser and website support remains as horrible as it currently is.
I'm not a web developer, I don't know the details, I only know that when I'm browsing normal regular web pages, Safari is awesome and seems to use far less power than any other browser.