Hi there, COO here. I wrote a good response on this when we were branded as Kickfolio: http://www.quora.com/How-Does-X-Work/How-does-Kickfolio-work.... You're quite right - we stream diff'd GIFs and JPEGs at different times. We did originally try encoding with FFMPEG and other technologies, but surprisingly this works best! We're constantly improving the algorithm. I'm just about to push up another change this weekend :)