The benefit of direct drive according to iGo and others is that "Direct-Drive produces 3 times more torque than other electric bikes. The Direct-Drive system is located in the center of the bikes balance, in the crank. Since the system drives the chain and not the wheel,... the power transfer from the chosen derailleur speed, provides seamless hill climbing power to the rear wheel.
In simple terms, our motor drive system powers our bikes the same way a human powers a bike, by the chain. So the derailleur effects the power of the bike the same way a conventional bike is powered."
The video below shows the normal deraileur action as well as the no drag pedaling
(Sorry for the noise in the background - apparently this was shot at a convention.)