It does, of course. You can mix your local library with Spotify, SoundCloud and many more.

It's currently identifying songs by meta-data only. There is an audio fingerprinter (using Last.fm's service) in the works, but as you can imagine that only solves part of the problem: getting fingerprints for data from all the various supported sources is a lot harder.

I noticed if I search "Zappa" it only shows one album that have artist name exactly "Zappa".

Would be nice if it also showed the other albums by "Frank Zappa"...

You may want to add a "local files" icon in the Multi-Source section of the home page.

Is it identifying song names by file metadata, binary fingerprints, audio fingerprints?

At the moment we are just supporting file metadata but we will hopefully add audio fingerprints soon.

AcoustID maybe?