This has been one of my favourite pictures for a while now. I have always found it to be the most intriguing of Escher’s works on a number of different levels, especially as the Droste effect has fascinated me since childhood. Escher’s picture is a clever illustration of the impossibility of the detached observer (to an extent that a more familiar application of the Droste effect would not have been) and is also interesting on a mathematical level. This article and this site explain this aspect of the picture in more detail.