Youtube allowing mobile devices to stream on 4K even though their displays do not support

This has increased Bitrate for me resulting in more sharper video. Looks good on a tab. Do try on your devices !!!

The latest update has this setting .

If my mobile's resolution is 1080p then how will it play a 4K video?

Accordingly to the article its more of a server side update. And the difference comes mainly in the bitrate, more bitrate less compression so overall artifacts will be less as compared to 1080p video.

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It'll downscale to the screen resolution. It's been a thing on Vanced for some time I think.