using HUFFYUV, afaik, which is a lossless video codec. Being a preservation project, lossless encoding is the way to go. As it is, the captures are pretty good, but being that the LD source is analog and has no error correction, disk scratches can lead to artifacts, so it's possible that they'll be replaced with "better" rips if better conditions LD's are found.
But either way, you're looking at a 720x480 capture from an analog source (which is already fuzzy, which leads to a worse quality picture than digital, but due to that fuzzy quality, it also makes it less compressible as the image is not clear and clean), so it is what it is. I have no issue with it. It's an amazing little game and I think that the addition of these things is excellent progress.