"Reduced" dynamically reduces the bit depth, based on where the noise floor is, in such a way that it isn't audibly changing anything. It is Leif's own implementation of the lossyWAV idea, and tends to be on the less aggressive side of what lossyWAV can do at default settings.
You can read more about lossyWAV here, which is somewhat relevant, especially in how the idea works with FLAC (and other lossless codecs).http://wiki.hydrogenaud.io/index.php?title=LossyWAV
The reason Leif made his own implementation is because lossyWAV doesn't work well with composite MPX, and Leif wanted that feature when recording composite MPX.
It's useful for streaming as well though, so why not have it available.