Image Compression?

[ZiNgA BuRgA]

Yes, it uses MyBB's resize functions to do the job.
Note that there's two primary factors affecting quality in scaling:
- scaling algorithm used (I suspect PHP's GD does a simple Bilinear scale)
- for JPEG, there's further quantization applied to the image - this is probably the source of graininess.
http://php.net/manual/en/function.imagejpeg.php
MyBB doesn't supply a quality argument, so it'd be using the default of 75%.  If you wanted better quality, you'd have to edit the imagejpeg calls, including a higher quality (say 90%) - note that this would affect all MyBB thumbnails too

Alternatively, if images are uploaded as PNG, there won't be further quantization, so no further quality reduction.