OK, here's the explanation why we save as dds. jpg file take a very long time to load and decompress. Really, really long, like 1 or 2 seconds, you can see how long when lfs says "saving skin" after a download.
On the other hand dds files are near instant to load - no decompression or conversion is required, they are used by the card in the same format as they are saved on disk - and they use much less memory on the video card than an uncompressed jpg. The video card cannot use jpg files directly, they must be expanded to raw / uncompressed, or DXT1 / dds - there are no other possible choices for a texture in memory on a video card. The purpose of DXT1 / dds is that it is a compressed format that can be used at high speed by graphics cards. The file size is larger than jpg, that's true. It's not optimised for file size, but speed of use in memory.
We still download as jpg - partly because that's how they are stored on the server, and also to keep bandwidth to a minimum - that is important because bandwidth costs money and servers. They are saved as dds files on your hard drive for two reasons.
1) It's the best option for quick loading and allowing a lot of racers online without overloading graphics card memory. loading is sometime like 0.1 second rather than 2.0 seconds, that is the sort of difference we are talking about.
2) Some users don't want their original skins available in just as high format as they are stored on LFS World - this is to prevent skin theft. although some of you may find that unimportant, that's not the opinion of those people.
I hope that helps explain what it's about. I will not get into a discussion about what files we should use for this or that, or whether we should use 2048 skins or save as original jpgs, or what person A, B and C would like and how it should be done differently. It's done the way it is for various reasons and that's how it will stay. It's simple : if you want to see acceptable nice resolution skins online, please pay and use them - it works and it works well!
But if you don't like it, don't use it.
Then everyone's happy.