Time Dilation Explained
During large fleet engagements, lag usually occurs. The reason is that so many players are sending actions to the server of a system, that the server can't handle all those action in a timely manner.
Imagine a bunch of houses with roads connecting to a building in downtown. Each house would be a person in EVE and the building in downtown would be the server. Now let's imagine that a car from a house is an action, like turning on your missile launcher. Normally, if just a few people drive their cars on the road, traffic goes smoothly. But if you have a huge number, then you get a traffic jam.
The actions being received/sent are not on a rhythmic pattern. Imagine lots of cars one minute and the next just a few. Thus there would be times of fast traffic and slow crawls (lag spikes).
What CCP did to combat this is to implement Time Dilation. TiDi would slow almost all actions. This is kind of like setting a speed limit on the road so that all the cars go at a steady smooth pace.
TiDi affects a node, the hardware hosting specific regions in EVE space. When lots of players start to overload a node, TiDi takes place. This not only keeps a smooth pace but helps prevent players from lagging out (where their client disconnects).
When TiDi occurs, it's like everything is in bullet time from The Matrix film. It's actually quite awesome the first time you see it.
How It Looks In The Client
When a node has a certain amount of load (due to player activity) all systems on that node will show an icon representing the current Time Dilation. You can see the icon on the screenshot, which has a yellow colour.
The rule of the thumb is:
|Icon Colour||Speed Reduction|
|Green||Slightly Reduced Speed|