It uses a bicubic interpolation scaling algorithm. This generates a better image if the size of terrain is significantly different from the size of the texture image.
Alpha maps can be generated using images, based on the height of the texture or based on the slope (0° to 90°)
DispGen includes an algorithm (jokingly described as 'pat. pending') for fixing texture stretching on the vertical parts of the terrain.
Note: This user found an issue using .vmf files generated by Dispgen. The map would not save user visgroups. When re-opened all user visgroups would be erased (though the content of the visgroups would not be erased). Any content inside user visgroups that was saved while the visgroup was unchecked was automatically placed in an "_orphaned hidden" user visgroup by Hammer. The solution was to copy the displacement brushes out of the Dispgen-generated .vmf file and paste them into a new .vmf file made from scratch.