A loop plays dry, then compressed, and you judge how much compression you heard. The processed version is matched in loudness to the dry one, so you can't cheat by listening for 'louder': only the dynamics change.
Level 1 asks a single question: no compression or heavy compression? Medium joins at level 2 and light at level 3. From level 4 the uncompressed option disappears and limiting, then pumping compression, join the pool, so you're choosing between shades of processing rather than on or off.
Mostly because compressors change loudness, and louder almost always sounds better, which hides what the compressor is really doing. Compare at equal loudness and listen to the attacks and the space between notes: that's where compression shows.
Transients that lose their snap, quiet details that come forward, and on heavier settings the volume breathing with the beat. Drums and vocals make these changes easiest to spot.