What is Dithering?
Also called: dither
Dithering is adding a very small amount of noise to audio when its bit depth is reduced, for example from 24 bit to 16 bit. The noise replaces the distortion that simply cutting off the extra bits would cause.
When you lower the bit depth, every sample has to be rounded to fewer possible values. Without dither, the rounding error follows the music, which turns into a gritty distortion on quiet sounds like reverb tails and fade outs. Dither randomizes that error so it becomes a steady, very quiet hiss that the ear hears as natural.
Noise shaping is a refinement that moves most of that noise into the high frequencies, where hearing is less sensitive.
The rule of thumb is to apply dither once, at the very end, whenever the bit depth goes down. It is not needed when you export at the same bit depth or to a 32 bit float file.
Example
Exporting a 24 bit master to a 16 bit WAV for CD: add dither on that final export, not on the mixes before it.
Put it to work
Convert audio between formats, sample rates and bit depths.
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