Lossless vs Lossy
Definition
Two categories of audio compression. Lossless compression reduces file size without discarding any audio data — the decoded file is bit-identical to the original. Lossy compression achieves greater size reduction by permanently removing audio information deemed less perceptible.
In Simple Terms
Lossless keeps every bit of your original audio (WAV, FLAC). Lossy throws away data your ears probably won't miss to make the file smaller (MP3, AAC). Always work in lossless and only convert to lossy as the very last step.
In Practice
WAV and FLAC are lossless formats. MP3 and AAC are lossy. A 24-bit WAV master delivers the full audio to a mastering chain; a 320 kbps MP3 delivery to the consumer discards some data but is generally transparent to most listeners.
Common Confusion
Lossy does not necessarily mean audibly degraded. At high bitrates (256 kbps AAC or higher), the difference from lossless is inaudible on most playback systems. The concern is cascading: each re-encode introduces new artifacts.