How ArcGIS Server directly connects to ArcSDE on SQL Server depends upon how the SQL Server server and client are configured. According to a SQL Server 2008 R2 MSDN web page on Configuring Client Network Protocols, "he protocols available for SQL Server clients are TCP/IP, Named Pipes, VIA, and shared memory."
Both the server and client can allow or disallow certain protocols as well as prioritize them. Since VIA is deprecated and shared memory is only local, that leaves Named Pipes and TCP/IP. Unless you have modified defaults, I am guessing your configuration is using TCP/IP.