I'm pretty sure it's just using a slightly modified Elo rating, and the updating the ladders on a weekly cron. The reason I say this is that when I first signed up, it assigned me to Silver league. I lost a bunch (it was before the beta was opened more widely and everyone there was good) at first. Then I got considerably better and won something like 17/20 games, but got bumped down to Bronze.

I can't think of any reason why I could get bumped down after a considerable winning streak other than a cron, especially since it always told me my opponent was a favorite over me and was presumably a higher Elo. It had to have been accounting for the 20 or so games I lost before I figured out what I was doing, otherwise I would have been bumped down far sooner.

(Bronze was a cakewalk, I won most games in a few minutes.)

Then they did a reset and now I'm in Silver and winning more than not. I might actually make Gold whenever the cron runs next.