WebP is an image-format - developed by Google - aimed to reduce the size of images dramatically. While still in development, WebP-images already allow you to reduce the size of JPG or PNG images. Unfortunately, the WebP image-format is at this moment only supported by a small number of browsers.
For using this extension, you will need to install WebP support on your server. Either upgrade PHP to version 5.5 or higher and make sure the ImageMagick module has webp support built into it. Or download the cwebp binary from the Google WebP project and install that binary on your server:
If your PHP environment does not list WebP as being supported (a simple phpinfo() will tell you whether this is the case or not), or if you don't whether it is being supported, the binary solution is the right way to go for. Once the binary is installed in your environment and you have verified its workings via SSH, you can configure the path to the binary in the Magento System Configuration under Web > Webp images. The binary path that you will configure usually is something like this:
You can see a demo of the WebP extension for Magento by visiting the Yireo demo-site http://magento1.yireo-demo.com/ with a WebP-enabled browser. Currently the Chrome browser supports WebP out of the box, while for Firefox there is a WebP plugin available.