[StevenWaterman]

(High level, specifics are definitely wrong here)

The VAE isn't really pixel-level, it's semantic-level. The most significant bits in the encoding are like "how light or dark is the image" and then towards the other end bits represent more niche things like "if it's an image of a person, make them wear glasses". This is way more efficient than using raw pixels because it's so heavily compressed, there's less data. This was one of the big breakthroughs of stable diffusion compared to previous efforts like disco diffusion that work on the pixel level.

The VAE encodes and decodes images automatically. It's not something that's written, it's trained to understand the semantics of the images in the same way other neural nets are.