ConTeXt is mainly a macro package written in the TeX language. The current
version MkIV is written for the TeX backend LuaTeX, which is written in C and
opens up part of the TeX internals to a Lua interpreter, which the ConTeXt
macros heavily use.
Could all of TeX be rewritten in Lua, or are there good reasons against it?
Sure, nothing prevents you from rewriting TeX in Lua, but it would not make
much sense. It already has a brilliant C implementation with Lua interface.
What would be the benefit?
How was the pascal translated to Lua - automatically, or did someone understand it in it's entirety and rewrite it?
The pascal code was never translated to Lua. The pascal code has been
manually converted to C.
Here are some slides which depict how LuaTeX is comprised:
Taco-LuaTeX-talk-2007
torture test. – Yiannis Lazarides Mar 6 at 17:44