In FPP > 3.1, there is a new "Proxy" menu item on the Status menu. There you can enter the IP address of the controller that sits behind it (like a Falcon) and it then creates a link that you can click on to access the web interface and such without needing to configure strange routing things and such.
That setting in xLights allows you to leverage that. The FPP Proxy ip is the IP of the FPP instance that has the ip address configured. It does a couple things:
1) For the upload to the Falcon controller, it will upload through the proxy URL that FPP creates.
2) For the upload to FPP (for remote) via FPP Connect, you can have it setup the UDP outputs (e1.31) only for the controllers it is proxying.
3) When you turn on "output to lights", instead of sending data directly to the Falcon controller via an IP address it really cannot reach, it uses DDP to send data to the FPP instance which, if running in bridge mode, will then forward it off to the Falcon controller.
Basically, if FPP is reachable from xLights and the controller behind it is not, it's easy to set it up so that xLights can still configure it and send data to it.