How does wrapfig internally work?

Question

wrapfig is a LaTeX package designed to make it possible to let text flow around images. I am acquainted with the documentation, which was written with the needs of an end user in mind. But how does wrapfig work internally?

The basic procedure (make whitespace for the image, use the driver to place it) is conceptually clear to me. But I am curious:

1. What is the "big picture" of wrapfig's low-level method of operation?
2. (How) Does wrapfig somehow determine the hyphenation points at which the floating text shall break?
3. Is it correct that wrapfig currently is not able to have text on both sides, such that the text continues on the other side? (Think of the image placed in the middle of a column.)

Sadly, I am way too bad in TeX to be able to answer my questions myself using wrapfig's source code and "Random implementation notes" within the documentation.

Answer 1

TeX has a \parshape primitive that specifies a number of special lines before a paragraph then for each line, a pair of (left margin, line width) pairs. The last pair is used on all following lines, so

\documentclass{article}
\setlength\textwidth{6cm}
\begin{document}
\newlength\shortline
\shortline=\dimexpr\textwidth-2cm
\parshape 4
0pt  \shortline
0pt  \shortline
0pt  \shortline
0pt  \textwidth
One two three four five six seven.
Red blue green yellow white black.
One two three four five six seven.
Red blue green yellow white black.
One two three four five six seven.
Red blue green yellow white black.
\end{document}

Produces

So basically wrapfig sets the figure in a box to find the default length to cut and the number of lines to cut so as to produce the above, then it drops in the figure in the space:

\documentclass{article}
\setlength\textwidth{6cm}
\newlength\shortline
\begin{document}
\shortline=\dimexpr\textwidth-2cm
\parshape 4
0pt  \shortline
0pt  \shortline
0pt  \shortline
0pt  \textwidth
\noindent\smash{\rlap{\hspace{\textwidth}\llap{%
\hspace{2mm}%
\rule[-.8cm]{1.8cm}{1cm}}}}%
\indent
One two three four five six seven.
Red blue green yellow white black.
One two three four five six seven.
Red blue green yellow white black.
One two three four five six seven.
Red blue green yellow white black.
\end{document}

Producing

The clever part of the package is detecting if you need more than one paragraph and if so constructing a new shorter \parshape for the later ones.

\documentclass{article}
\setlength\textwidth{6cm}
\newlength\shortline
\begin{document}
\sloppy
\shortline=\dimexpr\textwidth-2cm
\parshape 4
0pt  \shortline
0pt  \shortline
0pt  \shortline
0pt  \textwidth
\noindent\smash{\rlap{\hspace{\textwidth}\llap{%
\hspace{2mm}%
\rule[-.8cm]{1.8cm}{1cm}}}}%
\indent
One two three four five six seven.
Red blue green
\parshape 2
0pt  \shortline
0pt  \textwidth
Yellow white black.
One two three four five six seven.
Red blue green yellow white black.
One two three four five six seven.
Red blue green yellow white black.
\end{document}