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Lossy, lossless and MP3

'lossy'
"A term describing a data compression algorithm which actually reduces the amount of information in the data, rather than just the number of bits used to represent that information. The lost information is usually removed because it is subjectively less important to the quality of the data (usually an image or sound) or because it can be recovered reasonably by interpolation from the remaining data. MPEG and JPEG are examples of lossy compression techniques."
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MP3 is a lossy format. Based on the compression settings chosen by the user, some of the audio data is thrown away or 'lost' to decrease the actual compressed file size. This is why the more an MP3 is compressed (low bitrate and sample rate, mono), the poorer the sound quality. As there are some elements in any sound recording that are inaudible to the human ear, MP3s still manage to sound good even with the loss of data.

'lossless' (opposite to lossy)
"A term describing a data compression algorithm which retains all the information in the data, allowing it to be recovered perfectly by decompression."
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