We have 1278 paid games that are included and 55 that are excluded from family sharing. Seemed to be mostly ubi, rockstar and ea games. Games that you claimed while they had a limited 100% discount are also excluded. The last few are live-service or mmo games.
"Family sharing" is now a feature listed on every store page. Same place as singleplayer, trading cards, cloud saves and similar. As far as I know no major changes has happened in which games support it, but that may change now that sharing gets more attention.
I haven't played in a few years but this is how I remember the system working: RDO matches people into separate lobbies based on what version of the game they're running and this check is done by hashing one or more files in the install directory. By adding junk data to one of those files you more or less guarantee that you'll only ever encounter other people who have the same junk data added. It's basically the dark souls password system with extra steps.