By Koen Tanghe @ Smartelectronix.
This effect is a delay line granulator and it works like this:
Incoming (mono) sound is fed into a delay line from which small pieces of various durations and at different moments in the past are selected. Each of these pieces is then amplified, transposed and enveloped to form a "grain". Each grain is also randomly panned and the whole mix is sent out to a stereo output stream.
Feedback of the grain output back into the delay line is also provided, and the delay line can also be frozen so that the grains are only taken from what is currently stored in the delay line.
Inspired by the great DLGranulator effect in Ross Bencina's AudioMulch.