This really has puzzled me. I downloaded a few favourites and watch them on VLC or Infuse on my AppleTV. In the YouTube app I can use the "nerd stats" to confirm I am viewing the exact same video/audio streams...
... it could be my imagination but it seems like YouTube does a really subtle kind of filter that makes the "blocky" compression artifacts smoother. It doesnt ehance edges or anything - my guess is it looks for areas WITHOUT edges where there are sublte shfts of colour, and it makes the blocky artifacts less prominent.
... it's really subtle and I still cant tell if its just my imagination, like my OCD thinking that my downloaded video doesnt look as good and yet, I noticed on YouTube the video feels more vibrant and solid. When I watch my downloaded vid there are these really sublte, but noticable artifacts often in the background , in the shadows and these constant tiny little jitters even on a 1440p video - make the final picture look not as good.
Am I making this up?
Audio wise there is definitely a change as well. YouTube audio is always more or less level for me, while a downloaded video always needs to crank up the volume which is annoying.
I wish players like VLC or Infuse did whatever YouTube does to make videos just more pleasant to look at. I dont think YoUTube changes the colours or does any kind of vibrancy filter though I may be wrong, but it does things to "level" audio so that you have a more consistent experience going from one video/channel to another.