I though DNG had lossless compression for the RAW data. I've heard it's better compression than most manufacturers files (e.g. .cr2).
Adobe has added a new flavor with lossy compression. You can try it in the Lightroom 4 Beta. It has a higher quality than jpeg, and smaller files. You have three dng options now.
1. DNG plus raw
2. DNG (not lossy)
3. Lossy DNG http://news.cnet.com/8301-30685_3-57371809-264/adobe-offering-new-reasons-to-get-dng-religion/
Here is some info taken from the link
The lossy DNGs are another matter altogether, though. Some people like raw photos because they record the original image exactly how the camera captured it, with no artifacts resulting from JPEG compression throwing away some data. Lossy DNGs, though, throw away data to produce a file size something like a quarter the size of a regular lossless DNG.
To do that, Adobe demosaics the raw data so that strictly speaking it's not raw anymore. More alarming to some, the original 12-,14-, or 16-bit raw data has been boiled down with the JPEG algorithm to 8 bits, meaning that there aren't as many gradations of color values.
But Adobe didn't just make an ordinary JPEG. First of all, the eight bits of data are carefully distributed according to each image with a "stretched" tone curve, Chan said in a forum post. Second, Adobe "dithers," which means it carefully adds a little noise when moving to 8-bit values, which can actually improve the appearance.
And unlike JPEGs, the lossy DNGs preserve much of the flexibility of raw, such as the ability to change white balance, keep a wide color gamut, and recover overexposed highlights, Chan said.
But while Adobe likes the lossy DNG option and believes some will enjoy its more economical storage demand, it doesn't suffer the illusion that it's for everybody.
"It's not a default nor an option for everyone," Hogarty said. "However, I know that a number of photographers shooting time lapses in a raw format or looking to archive outtakes in a more compact format will appreciate the flexibility." And some could use it as an archival format for second-tier photos.
And Adobe does care about lossy DNG image quality, and it encourages people to test it to see what they think. Here's Adobe's process, he said:
The way we've been testing this is by taking original raw files, making lossy compressed DNG versions of them, and developing the two pictures in Lightroom and then opening the results into Photoshop. We toggle between the two, and try to determine visually which is which. We do this at multiple visual scales (Fit View, 1:1, 2x, 4x, and even higher). Then we do a diff between the two images to scrutinize the visual structure of the differences"