The Windows equivilent would be instead of putting application data in the AppData folder, it throws it in Documents, My Games, or just in the home folder directly.

Most software on Linux is configured to place their config files in ~/.config. Some others, like the ones in the pic, just dump them directly into your home folder.

Yes.

Many applications have configuration files. Historically these files were placed in your home directory aka "on the floor". The variable mentioned defines a directory where these files should go. Many applications ignore this.

A non-linux version of this meme might go,

"Here is the pizza you ordered"

"Great, could you put it in my hands"

"Lol (throws pizza on floor)"

$XDG_CONFIG_HOME is an environment variable that programs can (and should) read to determine the location for storing dotfiles (config files, kind of). Not reading (or caring about) the environment variable, and not adhering to the default of /home/username/.config/ results in them ending up in the home directory.

So in linux you have an extra directory just for configuration files/directories wich often start with a . (Dot) (that's why they are calld dot files). But some applications dont use that directory but rather just dump them into your user directory, wich causes it to get cluttered with files wich should be put into the ".config" directory