Translating translatewiki.net itself
How does that work? E.g. in the Dutch watchlist there are a few literal occurences of "$1". I suppose this is a translation problem.
I've translated the site messages to Frisian recently. There was a reference to it under Special:LanguageStats, but it seems to be gone now (except Twn Main Page). The translation tool isn't accessible via the system messages either, so searching the MediaWiki namespace seems to be the only way.
Cheers!
Translations of MediaWiki and extensions can be done in the regular way. There is some delay before those translations are applied because they need code deployment (not taken directly from the wiki like in other wikis).
There are some translatewiki.net specific message groups where translations apply right away.