Hey @jamieschmid, happy to help clarify some more!
The raw data that you would find in the /var/lib/mysql folder is the active MySQL database files in the Local VirtualMachine within VirtualBox.
The SQL files in the /app/sql/ folder are simply a safety net backup in case something happens with the VirtualMachine. If something did crash or get corrupted in the VirtualMachine, you could certainly attempt to try a recovery using the /var/lib/mysql data if you still had access to it. If not, you would at least have the SQL files from the last time the VM was successfully shut down (better than nothing at all).
In the case that there was a problem with the VM and it had to be removed or recreated, Local will import the SQL table files from the /app/sql folder.