This is a brief summary for a while paper released Aug 2016 explaining how the server side synchronization works:
Server-side synchronization, also known as Server-Side sync or Exchange sync, is a server-side process for synchronizing appointments, contacts, tasks (ACTs), and email messages between Exchange Server and Microsoft Dynamics CRM Server. Server-side sync runs as part of the Asynchronous Processing Service.
Since the server-side sync component is hosted on the server running the Microsoft Dynamics CRM Asynchronous Service server role, it brings some advantages. First, the current Microsoft Dynamics CRM Asynchronous Service already loads the full set of organization metadata-caches. If server-side sync ran in another process, these large caches would have to be loaded a second time resulting in sub-optimal memory use. Second, it gives server-side sync access to the full set of organization metadata-caches that’s loaded in the Microsoft Dynamics CRM Asynchronous Service process.
Unlike Outlook synchronization, which requires CRM for Outlook to support synchronization, server-side sync can support synchronizing activities between Dynamics CRM and Exchange without running CRM for Outlook.
Typically, the server-side sync loading mechanism makes sure each mailbox that needs processing is serviced within 15 minutes.
When queuing mailboxes to process, server-side sync provides some configurable values located in the DeploymentProperties table of the configuration database that you can adjust by using Windows PowerShell to customize the queueing capacity in your environment. Notice that this configuration is available for on-premises deployments of Dynamics CRM only.
The default in memory queue settings are configured for mid-size organizations, which typically work best for organizations that have between 3,000-5,000 users.
Queue performance depends on the number of users and item workloads across the servers running the Asynchronous Processing role. You can use Windows PowerShell to either increase or decrease the settings, depending on the number of users and email or activity synchronization experienced.
When the Asynchronous Processing Service server role is deployed on more than one Windows Server there is no affinity between mailboxes and the servers on which they will be processed.
Dynamics CRM Server Setup facilitates administrators by allowing the selection the of Email Integration Service capabilities as a separate server role. This can help improve performance and scalability by isolating email integration specific operations for on-premises deployments during installation. The server role can be isolated by selecting only Email Integration Service.
One of the first steps to successfully run server-side sync involves configuring an email server profile. In Dynamics CRM on-premises, the email server profile facilitates administrators to specify configuration settings such as server types, server locations, and authentication details.
You can find in this MSDN article the complete steps for configuring Server side synchronization to connect Dynamics 365 on-premise with Exchange Server on-premise.