What is this kind of distortion called? Today while watching a movie I noticed the following distortion:



Note. The red ring is me painting over to show the area of interest.

There are certain areas in which I can see non-smooth shades of different colors. What is this distortion called and what is causing it?

This is the video meta information in case it helps:

Video #1
      ID : 1
      Format : AVC
      Format/Info : Advanced Video Codec
      Format profile : High@L4.0
      Format settings, CABAC : Yes
      Format settings, ReFrames : 4 frames
      Codec ID : V_MPEG4/ISO/AVC
      Duration : 43mn 1s
      Bit rate : 5 109 Kbps
      Width : 1 920 pixels
      Height : 1 080 pixels
      Display aspect ratio : 16:9
      Frame rate mode : Constant
      Frame rate : 23.976 fps
      Color space : YUV
      Chroma subsampling : 4:2:0
      Bit depth : 8 bits
      Scan type : Progressive
      Bits/(Pixel*Frame) : 0.103
      Stream size : 1.54 GiB (85%)
      Default : No
      Forced : No
      Color primaries : BT.709
      Transfer characteristics : BT.709
      Matrix coefficients : BT.709
Your image with increased contrast:

Figure 1. Denis Kulagin's figure with gain applied.

That is kind of color banding due to quantization. Quantization errors can be made worse by repeated decoding and encoding, because quantization levels and things that are quantized may not match between the encodings. In video encoding, it is not directly the pixels that are quantized, but things like discrete cosine transform coefficients for 8x8 or so blocks of chroma and luma values of pixels. JPEG images compressed with a low quality setting exhibit color banding for the same reasons:



Figure 2. Top: 60 KB PNG file, Bottom: 2 KB JPEG file

Also color space conversions may introduce quantization errors and banding. For example sRGB and Rec. 709 transfer characteristics differ at worst by about a factor of two at low intensities.