There is no entry in the wiki for what this option does and affects

After doing a 2 minute research, I'm assuming it's related to Mojang's DFU. Is it safe to assume then that with the optmiization these codecs are loaded only when they are called or needed?

Mojang creates and stores a codec object for every block, which is completely fine for most modpacks. If you are trying to make a mod with a million blocks (as I was doing for some testing), this becomes rather expensive. The optimization modifies the game to generate the codecs on the fly, but mods that expect the codec to always be present (e.g. C2ME) will break. That is why it's not on by default. It's not really worth enabling unless you have hundreds of thousands of blocks, and I have never seen a real pack meeting that criteria.

Should be documented now.