3D engraving uses something called Depth Mapping, which is usually created in a program like Blender or Zbrush, although there are some workarounds for those who don’t have the $$$ to blow on Zbrush.
Link here:
Since it is a raster image, the 3D Engrave option will only show up in the Glowforge User Interface for raster images, and it is limited to hardwoods, acrylic and draftboard. (3D engraving on plywood generally doesn’t work very well because of the veneer.)
If you are using Manual Settings, you can duplicate the effect of the 3D Engrave process by using Vary Power rather than Convert to Dots.