To my understanding it works like this:
There are several channels for sounds to be emitted by an entity. Let's take footsteps and weapon sounds. These two sounds can be emitted (and therefore heard by other players) simultanuously as they are assigned to the different channels CHAN_BODY and CHAN_WEAPON. Now there comes a third sound - jumping. This sound will also be assigned to CHAN_BODY and therefore the "old" sound (the footstep) that was played at the same time would stop and only the jump sound can be heard.
So, basically, you only have a limited amout of channels and therefore only a limited possibility of sounds being played from an entity at the same time.
- Don't take that for granted but I think I'm right
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