Technical Overview
HDCD encodes the equivalent of 20 bits worth of data in a 16-bit digital audio signal by using custom dithering, audio filters, and some reversible amplitude and gain encoding; Peak Extend, which is a reversible soft limiter and Low Level Range Extend, which is a reversible gain on low-level signals. There is thus a benefit at the expense of a very minor increase in noise.
That the encoding process is compatible with ordinary CD players (without audible distortion), is disputed: “Not being able to decode the peak soft limiting, a normal CD player will output distorted peaks”.
Read more about this topic: High Definition Compatible Digital
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