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First, before the definition, a little background info:
Quests in Zelda Classic have, over time, become quite large files. The addition of new features and the creation of larger, more detailed tilesets have contributed to this. Therefore, at one point Dark Nation decided to implement a built-in compression feature which cuts the average quest's filesize to a mere fraction of what it would have been. This compression is standard in all files with the QST extension. Since ZQuest compresses and decompresses QST files automatically, there is a slight delay when saving or opening these files.
An unencoded quest, on the other hand, is a quest file that has been intentionally saved without compression. These files use the extension QSU. There are several instances where you might need an unencoded version of your quest, the most notable being the use of the Mapmaker utility.
Quest backups are also saved in an unencoded format. These use the extension QSB, but their format is the same as QSU. The only difference is that ZQuest will save over QSB files automatically if the auto-backup option is turned on.