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Keeping this in consideration, how does Kubectl proxy work?
Run kubectl proxy in a sidecar container in the pod, or as a background process within the container. This proxies the Kubernetes API to the localhost interface of the pod, so that other processes in any container of the pod can access it. Use the Go client library, and create a client using the rest.
In respect to this, what is KUBE system?
kube-system is the namespace for objects created by the Kubernetes system. Typically, this would contain pods like kube-dns , kube-proxy , kubernetes-dashboard and stuff like fluentd, heapster, ingresses and so on.
The Kubernetes controller manager is a daemon that embeds the core control loops shipped with Kubernetes. In applications of robotics and automation, a control loop is a non-terminating loop that regulates the state of the system.