Jellyfin will transcode the moment it determines the source isn't directly streamable. Broken headers, weird containers or general MP4 weirdness can fail the test and make it transcode, but usually direct streaming is the default. If that happens to me, I just copy the download URL from the Jellyfin client and paste it into VLC. That method causes major network traffic (so it doesn't work great on mobile networks on the move) but it'll work fine from home.

Transcodes without hardware acceleration are pretty slow and the transcodes themselves aren't cached which can be a major pain, but with some effort I've managed to get hardware encoding and decoding working through Intel Quicksync (on an entirely separate device, even, through rffmpeg.py!) and things seem to be working great. The isolation Docker provides will make enabling hardware support a pain if you're using that, but if you're running the native package then I'd definitely recommend trying to get hardware acceleration support working.

So in theory someone could use it to build their own mini Locast?