It is unfortunate that YouTube has decided to use language in a rather sloppy manner. YouTube calls it "quality" when the correct term would be "resolution." YouTube videos list resolutions, not various levels of quality, when you click the gear icon within the YouTube player. Resolution & quality are NOT the same thing. You can have a low quality video at resolution 1920x1080 & you can have a high quality video at resolution 1920x1080. Same resolution, different levels of quality. In general, since YouTube is such a large repository of content, they compress what people upload, compress it a lot. They may say it's 4K (3840x2160) resolution but it's actually low quality 4K content. You can get an idea of the quality of a clip (after you download it) by looking at the file's properties. The quality of the clip is reflected in its bit rates. If you download from other web sites, you'll quickly see that quality of content from elsewhere is consistently higher than on YouTube.
What you see listed on the VDH menu is what's on the YouTube web site. Same is true on any web site. The resolution & quality are chosen by the person who uploads the content. Once it is uploaded, the web site, especially YouTube, then further controls the quality.
When it comes to MP4 vs MKV vs WEBM, there is no "better" or "worse" format. You'll see content of comparable resolutions & quality levels in all those formats. Those are just the container types for the content. Since VLC can play any of those equally well, you should not be concerned with choosing one over the other.
Then there is the method by which MP4/MKV/WEBM files are transmitted to you. They may be simple files, they may be chunked & transmitted via HLS, they may be chunked & transmitted via ADP, they may be chunked & transmitted via DASH. I must say that I have seen ADP only on YouTube. Maybe my experience is narrow. Maybe other sites use ADP. I just haven't seen it. ADP might be something YouTube invented. I don't know. In any case, the transport technique does not control either resolution or quality level, just as file format does not. VDH simply presents you with whatever it finds on the web site.
VDH does its best to list the variants it finds on the web site in descending order of resolution. On some web sites, not usually YouTube, clips at a given resolution are presented with differing quality levels. When VDH detects the presence of such content, VDH once again tries to present those in descending order within the resolution. So you should tend to select variants higher up on the VDH menu, without paying too much attention to MP4 or HLS or any of that. Just look at the resolution.