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..But what do they mean by "better" compression? And if I use the better compression the file size will be smaller..
This is internal compression of the Gimp .xcf image, new = zlib old = RLE and better is (hopefully) also more reliable.
There is also external compression (xcf.bz2 / xcf.gz / xcf.xz), which does not give much advantage but it all depends on the type of image, A typical small (1600x1600px) photographic image might be
2.10 format better.xcf 6.8M better.xcf.gz 6.8M
older.xcf 7.3M older.xcf.gz 6.0M In this case, best compression Gimp 2.8 format with external compression.
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what is up with the "select file type by extension"? How does that work
For File -> Open it will filter out the image types
For File -> Save or File -> Export it will add the correct extension and save/export in the chosen format.
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So if I don't do anything with the layer mode normal, everything else I do in 2.10 will work in 2.8?
The save dialogue just gives advice if you want to save a Gimp .xcf that is compatible with previous Gimps.
Most usual is the new layer modes, do this manually or there is a plugin to convert between new and old
There is bit-depth. Gimp 2.10 can save with more than 8 bit, which is not available in Gimp 2.8
There are color modes sRGB and Linear. Gimp 2.8 does not use Linear.
Meta support was almost non-existent in Gimp 2.8 so that appears frequently.