There are two essential elements to programming such smooth scrolling on the C64:
- Use C64 hardware scrolling, which can move the screen in single pixel increments, but only for 8 pixels.
- Use double buffering to scroll the back buffer by 8 pixels during the time that hardware scrolling is doing the front buffer.
Since hardware scrolling and screen swapping are fast, there are a lot of cycles available over 8 frames to do the "chunky" 8 pixels worth of software scrolling. This can be done in all VIC-II graphics modes. You do have to deal with some extra complication if using color RAM, since that can't really be double buffered. One common technique is to update the color RAM during the raster by "chasing the beam" so that those color updates don't become visible until the next frame.
In the case of The Sentinel, it is apparent that the off-screen elements are too complicated to be computed in real-time while also smooth scrolling the screen plus implementing some game logic. So the long delay between scenes is probably used to compute the off-screen areas and use these pre-computed pixels for the course software scrolling. And blanking the screen during computation speeds things up a little since it eliminates VIC-II "bad lines" that normally steal CPU cycles. Farther performance could be gained if the game detected running on a C128 and also switched the CPU to 2MHz during screen blanking.