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I have a friend who tried to upload a company logo as banner on a Facebook group, but it seems like Facebook compressed or changed the image in some way after upload, so the resolution was scrambled.

Does anyone know what it does, and what format/size gives the best result?

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Most probably they compress it to a degree; otherwise they would have too much of a bandwidth/space problem; this is pretty normal among a lot of social networking sites.
Ask your friend to upload a better quality image so that it won't be compressed that much, that should help.

I doubt anyone would know the specifics of how Facebook does it.

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