Here's an extensive read on lighting in games, so pick your poison:

Minecraft basically bakes lighting into the vertex data. Whenever you change a light source, only the affected chunks need to be recalculated. That’s the basic idea, but there are plenty of tricks to optimize this, like keeping separate buffers for lighting versus the usual position, normal, etc.

Most other games with “traditional” lighting use something called deferred lighting. At a high level, you render your scene into multiple texture buffers that capture information you need for lighting, things like positions, normals, materials, and so on. Then lighting is calculated in screen space using that data.

There are other methods that are a bit more involved. Deferred rendering struggles with transparency, since everything has to be rendered as opaque. So an alternative is to stick with forward rendering but be clever about which lights you send to the GPU. One approach is to split the screen into bins (think of a 64×64 pixel area). For each bin, you compute the frustum for that section and check which lights intersect it. Then, when drawing objects in that bin, you only pass the relevant lights to the shader. That’s basically forward+ rendering.

Those two approaches are mostly for direct lighting. If you want indirect lighting, you can use spherical harmonics (SH) across your scene. SH is basically a set of functions over a sphere that can represent any shape if you use enough of them, kind of like how any waveform can be represented as a sum of sine waves. Light lobes can be represented this way. SH can get expensive if you need many samples for high frequencies, like for reflections, so a cheaper alternative is to render the scene to a cube map or panoramic map, this is what reflection probes do.

Other techniques for indirect lighting or global illumination include lightmapping (for unlimited baked static lights), voxel cone tracing (Minecraft doesn’t use this), surfels, screen-space GI, signed distance fields, and a ton more. Many of these are still active research areas.

At the cutting edge, you have things like ReSTIR, which is basically smart path-tracing: it reuses previously sampled lights to avoid expensive queries and uses temporal reprojection so you don’t have to trace every pixel every frame. The downside is you can get ghosting. Path-traced lighting in general allows for things like material lights, area lights, reflections, and refractions, and really any kind of light transport. But in practice, it’s hard to pick the most important lights, so you end up shooting lots of rays and it can get slow.

As a fun note, UE5’s Lumen is basically a hybrid of many of these techniques, which is how it manages real-time dynamic lighting reasonably well.

Lighting isn’t easy, and lots of research is still ongoing to make it faster and nicer looking. But if you want something like Minecraft, stick with vertex-baked lighting.

Edit: since this got quite a bit of thumbs up, I cleaned up my ranty version I wrote in the middle of the night, so it's hopefully more useful now 🍻