The panel replaces the well-known backlight with a reflective layer – this means that any light that hits the watch will be then used to illuminate the display from the inside and show the image. Aside from saving a lot of battery power, this will also help make the watch view-able in direct sunlight, as more incoming light would mean more backside illumination. The major drawback is, and we assume Sharp would be looking for a way around this, the fact that the display can not be viewed in the dark.
The other power-saving feature, employed by Sharp's prototype, is the implementation of semiconductor memory – a random access memory with fast access times, which, in this case, is used for storing and reproducing the on-screen image, reducing power consumption in the process. For the picture, Sharp uses a LTPS (low temperature polysilicon) LCD display with only 8 colors.
It is said that Sharp has been in talks with various manufacturers over implementing the tech in a smartwatch, though, there is yet no word on whether any of them agreed to a partnership.
source: PadNews (translated) via GSMDome