It bypasses all analog processing of the signal by the VHS player and captures the video signal directly from the tape head.
All further processing is then done in software. If any improvements in software processing is made, the "raw" capture can then be reprocessed with better results.
An example - S-VHS tapes can not be played back in regular VHS players. They can't handle the format.
But with vhs-decode, it doesn't matter. A regular cheap VHS player can "rip" an S-VHS tape.
And decode the HiFi FM-stereo signal, too.
For a long time a great S-VHS deck, professional Time-Base-Corrector and so on from a TV studio, was the better option over vhs-decode software, especially on bad tapes. But now, I'd go with vhs-decode any day.