Maybe that explanation should have deserved its own topic.
When you see a video playing in a Web page, this is a Web server sending a video file to some Flash program running on your browser (in the case of HTML5 videos, it's a browser component instead of Flash).
What VDH does is that it detects this video by watching the network traffic and makes that video file available verbatim to your local disk. There is no loss nor improvement in quality, this is the same file.
A very few but highly popular sites, specifically YouTube and DailyMotion, offer several variants of a same video, from very low to high or very high quality. For those sites, VDH does some special job and makes all those variants available for download to the users.
In the case of YouTube, there can be over 100 possible variants (considering the combinations of available audio and video streams). Since it wouldn't be convenient for users to choose in such a big list of possibilities, VDH reduces the choice to a short number (by default 6) of variants. Of course, this short list of variants is not random. VDH comes with a default order of preference that can be changed in VDH settings. Potentially, a user has access to any variant. So basically, this user gets what he/she asked for.
Then comes the converter. The converter is useful for 2 cases: aggregation and changing formats.
Aggregation: some variants on YouTube (they call them adaptive variants), separate the video and the audio in 2 different files. Since the video player on your computer needs a single file, the audio and video files are downloaded separately then assembled together using the converter. There is no loss of quality, because the original audio and video codecs (the algorithms for transforming sound and images into data) are preserved. They are just put together in a single container. Not that variants that require aggregation can easily be spotted since they hold "ADP" in their description.
Changing format: independently from the aggregation, users may want to change the format of the file they downloaded (and maybe aggregated). This might be because the device they want to play the video on does not understand the original format or for whatever reason. Video conversion is something complex and there are over 100 parameters that can be tuned for a single conversion operation. There are many cases where you can lose quality at this stage. For instance, if the requested output bitrate is too low, the resulting file will be smaller, but with pixelated images.
Since tuning the converter can be tricky, the VDH conversion system offers a mechanism to define output configurations (set of conversion parameters), name and save them, so that they can be reused over many conversion requests. VDH comes with a few preset configurations. One of our mistakes when we released the first version of VDH5, was not to provide enough presets, and with a too low video quality. Just keep in mind that we had to rush for releasing a new version since the latest Firefox 36 broke VDH4 ability to perform downloads. We will improve those default presets this in the next version.
With those information in mind, we can work on your case. Can you provide us with the address of a video page you downloaded from and the variant you chose ? Did you use the converter ? If so, which output format did you use ?