From BlenderWiki

Displacement

Implementation not finished yet, marked as experimental feature.

The shape of the surface and the volume inside its mesh may be altered by the displacement shaders. This way, textures can then be used to make the mesh surface more detailed.

Type

Depending on the settings, the displacement may be virtual, only modifying the surface normals to give the impression of displacement, known as bump mapping, or a combination of real and virtual displacement. The displacement type options are:

• True Displacement: Mesh vertices will be displaced before rendering, modifying the actual mesh. This gives the best quality results, if the mesh is finely subdivided. As a result this method is also the most memory intensive.
• Bump Mapping: When executing the surface shader, a modified surface normal is used instead of the true normal. This is a quick alternative to true displacement, but only an approximation. Surface silhouettes will not be accurate and there will be no self shadowing of the displacement.
• Displacement + Bump: Both methods can be combined, to do displacement on a coarser mesh, and use bump mapping for the final details.

Subdivision

Implementation not finished yet, marked as experimental feature.

For detailed displacement, the mesh must be subdivided into small polygons. This can be achieved by adding a Subdivision Surface modifier, but it is also possible to let the render engine subdivide the mesh.