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Compression is an area of computer-science which attempts to find ways to reduce the size of data to decrease the amount of memory that it requires. Compression can be seen all over the internet as many files come packaged as ZIP files or any number of other common compressed file-types.
In LSL there has always been a restriction on memory a script may use, and when sending data between objects, or to external services then compression may be considered as a way of packing more data into a single message, or reducing the overall size of your messages.