How does Xbox One gamesharing work when more than two accounts are involved?

Say for example, a friend shares his Xbox account with me and I download his games, what happens if I then share MY account with ANOTHER friend?

Will that second friend also be able to access my first friend's games?

Will that second friend also be able to access my first friend's games?

No.

You, Person 1, game share your library with Person 2. They get access to your games, and their own.

If Person 2 shares with Person 3, then Person 3 gets access to Person 2's library only, and none of the games from you (Person 1).

Also just FTR, this behavior holds true for GamePass games as well. They don't pop up in your ready to install section like regular purchases do, but they are available to download for free via the marketplace.