Previous versions are either copies of files and folders created by Windows Backup or copies of files and folders that Windows automatically saves as part of a restore point. You can use previous versions to restore files and folders that you accidentally modified or deleted, or that were damaged. Depending on the type of file or folder, you can open, save to a different location, or restore a previous version.
It doesn't actually "recover" the data from trying to read the drive; It does Restore the saved files, which is vastly different. Yes, if you delete restore points, you will delete those previous versions of those files also, so yes, eventually the file would be deleted. However it has absolutely nothing to do with using or reusing the disk space. It won't get overwritten no matter how much you use the hard drive. It is saved until you actually delete the restore points and such.