Instead, MD is recorded using Sony's Adaptive Transform Acoustic Coding (ATRAC) system, designed specifically for high fidelity audio using the latest in digital compression technology. As a result, ATRAC allows MD to offer the same 74-minute recording and playback time as a CD, with no loss in sound quality. ATRAC makes use of several psychoacoustic principles to adapt the audio signals to the ear's response. For example, the sensitivity of the ear depends on frequency, being most sensitive around 4kHz and least sensitive toward the higher frequencies. A sound that's audible at 4kHz might not be audible at another frequency. In general, two tones of equal power but of different frequency will not sound equally loud. As a result, quantization noise and other inaccuracies are less audible at some frequencies than at others.

ATRAC also uses non-uniform frequency divisions. The divisions are based on another psychoacoustic concept called critical bands, in which the ear perceives different frequencies using a series of these critical bands of varying widths. The width of critical bands increases with frequency. Because of this phenomena, ATRAC is designed with more divisions in the lower frequency range and fewer in the higher frequency range.

Since music signals are constantly changing, ATRAC features non-uniform time splitting, analyzing them in short blocks of time. When music changes quickly, as in active passages, the ear's sensitivity also changes quickly, so ATRAC splits time up into short blocks of 1.45 or 2.9 milliseconds to keep up with the music. When the music changes slowly, the time can be split into longer blocks of up to 11.6 milliseconds, because the sensitivity of the ear changes more slowly. The use of these longer time blocks enables the use of narrower frequency bands, which improves sound quality.

ATRAC's active flexibility is the key to realizing greater efficiency in data compression encoding, while maintaining excellent sound quality. Using algorithms that follow the principles of human hearing allows the MiniDisc format to realize a high level of operability and sound quality, while conserving disc space.