Image formats
Besides the basic PNG and JPEG also the next-gen formats WebP and AVIF are supported. Every modern browser supports WebP. AVIF is also pretty well supported, but takes longer to generate. Given the way multiple formats are supported using this addon as described above, browsers that support one of those will load them, while other will fallback to basic PNG/JPEG.
To give you an idea of the improvements possible with these formats, here are some examples. Note that the images might not show correctly if you are not using a modern browser.
A more detailed analysis can be found on Jake Archibald's blog.
JPEG
Dimensions: 640px × 427px File size: 30KB.
WebP
Dimensions: 640px × 427px File size: 18KB.
AVIF
Dimensions: 640px × 427px File size: 8KB.
WARNING
Generating AVIF files can take a lot of time, as it is very CPU-intensive. Therefore the format is currently not enabled by default in build plugins for local images.