How do games do digging, Like Dungeons?

So I’m watching my wife play Dungeons 4 - (very cool game) and she clicks a block underground, her peons will run up to it and start mining… the wall takes a little damage, then explodes… I’m curious how that effect is created? do you have a mesh for the wall (just a cube, I guess) then multiple meshes showing various damage? Like cracked, then really cracked then broke – Would I just do 3 different models and replace the current with ones after specific damage points? Like:

if hp are 100% show the normal one
if hp are 50% show the cracked one
if hp are 25% show the really cracked one
when hp = 0 play a “smoke” animation and remove it…

Am I thinking correctly?

Also, bonus points when her character is walking around the surface area sometimes there is a cool black circle around her that makes all the trees go from normal to decayed when she walks by, then back to normal… Is this a shader? video here

Look at 52 seconds when the “good” building is gone the evil spreads… What is this? a shader? Could someone possible link any information they have on starting with these, I really love that effect…

often yes this is how it works

Easy way is to just swap the sprites, you could also overlay a material over the blocks with the cracks, hard way is to write a custom shader but is dynamic.