From the youtube-dl source code, in a file helpfully called youtube.py:

    def _decrypt_signature(self, s, video_id, player_url, age_gate=False):
        """Turn the encrypted s field into a working signature"""

        if player_url is None:
            raise ExtractorError('Cannot decrypt signature without player_url')

It definitely does do decryption, as stated in the DMCA claim:

> is a technology primarily designed or produced for the purpose of, and marketed for, circumventing a technological measure that effectively controls access to copyrighted sound recordings on YouTube

.. and some claims referencing a 'youtube to mp3' site ruled illegal by a German court.

Not defending this, 'effective technological measures' are a horribly broadly-scoped hole, but there is decryption at play here.