On an encoder, a deblocking filter alters some of the pixels on the sharp edges that can form between macroblocks on predictive frames, esp. in areas of low contrast and at low bitrates. Think of it as similar to anti-aliasing, but that's a bit oversimplified.

The downside of deblocking is it smooths detail, and can blur the image if overused.

In Vegas, the deblocking is a fixed value; in more complex encoders, the predictive sub-blocks can be manipulated on many levels.