Our goal is to have the best-sounding site on the internet, but that is pretty tricky to achieve given how many different encoding/audio formats that exists. We currently transcode tracks down to 128 kbs CBR mp3 for the streams, so yes, stream quality is obviously worse than for uncompressed files. We are looking for alternatives (aac and ogg) for this in the future. we are also considering higher bitrates.
In the meantime, if you want optimal sound quality, you should upload uncompressed files, anything that is WAV, AIF, FLAC in 16bit or more, and 44.1khz or more, will yield the best stream quality. If you are uploading, say a 256kbs mp3 file, we will take that file and transcode it to 128kbs, which means you'll get the artifacts from the 256 encoding + the ones from the 128 encoding, which will sound worse than if you went from lossless->128. So that's my recommendation if you really care about audio quality!