setcap adds Linux capabilities to an executable. Capabilities are elevated privileged within the kernel for specific privileged "actions".
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Enable permissions for KMS capture.
Warning
Capture of most Wayland-based desktop environments will fail unless this step is performed.
Note
cap_sys_admin may as well be root, except you don’t need to be root to run it. It is necessary to allow Sunshine to use KMS capture.
Enable
sudo setcap cap_sys_admin+p $(readlink -f $(which sunshine))
Disable (for Xorg/X11 only)
sudo setcap -r $(readlink -f $(which sunshine))
Their install instruction are pretty clear to me. The actual instruction is to run
sudo setcap cap_sys_admin+p $(readlink -f $(which sunshine))
This is vaguely equivalent to setting the setuid bit on programs such as sudo which allows you to run as root. Except that the program does not need to be owned by root. There are also some other subtleties, but as they say, it might as well be the same as running the program directly as root. For the exact details, see here: https://www.man7.org/linux/man-pages/man7/capabilities.7.html and look for CAP_SYS_ADMIN.
In other words, the commands gives all powers to the binary. Which is why it can capture everything.
Using KMS capture seems way overkill for the task I would say. But maybe the wayland protocol was not there yet when this came around or they need every bit of performance they can gain. Seeing the project description, I would guess on the later as a cloud provider would dedicate a machine per user and would then wipe and re-install between two sessions.