Here’s a more indepth explanation: The (old) “dynamic image links” feature replaced all image links with the placeholder “{{wpppdynamic}}” in posts. That placeholder should be dynamically replaced by either your content path URL or your CDN URL when the post get’s displayed. The replacement was done to improve performance as it allows a much faster string replace instead of a slower preg replace to change image URLs.
If something goes wrong and the replacement didn’t work, your browser interprets the URL as a relative URL, displaying it as something like “https://yoursite.com/%7B%7Bwpppdynamic%7D%7D/image.jpg”. “/%7B%7Bwpppdynamic%7D%7D/” being the URL encoded placeholder.
The restore static URLs feature does a string replace on your database to restore all URLs back to your upload dir. How to do this manually is also explained in the FAQ.
So much for the explanation. Version 1.9 introduces a changed behaviour: It doesn’t use the substitution by default (when WPPP is newly installed), so just deactivating dynamic links restores normal behaviour of the site and nothing gets broken. To improve performance of this feature the substitution can be re-enabled optionally.
If you use any page caching plugin, the slower preg replace wouldn’t matter anyway.