Difficulty Bitcoin mining
refers to using targets greater than difficulty 1 for pool shares. With the advent of ASIC mining, many hashrates may be sufficiently high that difficulty 1 creates too much traffic for share submissions, and is expected to become necessary in the near future.
With rapidly-increasing hashing speeds, miners are rather wasteful in terms of bandwidth. Each share requires submission to the server, which must handle shares from all miners. This can be overloading, and is suboptimal.
Higher difficulty pooled mining saves bandwidth and does not affect the expected return; however, volatility is increased. For powerful miners, volatility should be low even with a higher difficulty, and the bandwidth savings can pay off.
Pools can allow miners to request their own difficulty level using the "target" key specified in BIP 23's basic pool extensions. No pool or pool software supports this extension yet; however, Eloipool (maintained by the Eligius pool) plans to offer this functionality in the near future.
Communication can be done, as with classical pools, with the getwork protocol (though some mining software implements this improperly). However, the getwork protocol itself cannot scale to faster hashrates. To take full advantage of faster miners, BIP 22 and BIP 23 are needed.