The easy explanation for the quality difference between your AVI file and your finished VCD is to check the file size of the AVI and then compare it to the amount of data that you can get on a CD. Your average CD is 700mb so unless you are copying small AVI files there will always be compression of your video file. Your captured video comes in at about 1GB for 4 minutes which means that even a ten minute video needs compressing to 25% of its original data to fit onto your VCD.
The best analogy I can think of is that when you used to record in Long Play on VHS, twice as much run time is squeezed onto the tape and the picture quality suffers a 50% degradation.
DVD discs have 6 times more storage than CD so far less compression is needed to fit your movie onto the disc.
Now the software that we use to compress our movies is very clever and does not compress every bit of the movie, it tries to work out what has changed frame by frame, pixel by pixel and store the relevant data in the new file type. However, if like me you shoot above and underwater it can get confused and you get pixelation. You will get far more on a VCD as it has to be compressed much more than a DVD.
If you cannot burn DVD's try SVCD which gives you better picture quality but shorter run time per disc.
I hope that explains things for you. I am sure that someone far more knowledgeable than me could give a far more complicated explanation but I have tried to keep it simple as I start to struggle when it gets complicated
Matt