So how does this work? According to Valve's Alexa Vlachos, SteamVR will automatically determine the speed of your GPU and will choose a resolution based on what it is capable of rendering. Vlachos says that many gamers have incredibly powerful graphics cards that simply aren't being utilized to their fullest potential in VR applications. Now, however, SteamVR will able to "up-res" an application resulting in a "clearer and better looking VR experience."
These new optimizations also work on the opposite side of the GPU power spectrum. For gamers that have graphics cards that aren't quite up to snuff to render on first-generation hardware like the HTC Vive and Oculus Rift which both have 1200x1080 displays, images will be rendered at "slightly lower resolution" to optimize performance.
If gamers don't like the auto-resolution settings set by SteamVR, then can be manually adjust in the video settings menu.
The whole point of this endeavor is to "[Take] the headset out of the equation for developers," said Vlachos. "Developers can now test their application against the GPUs they support without worrying about what future headsets will require. The same GPU attached to different headsets will render at the exact same application resolution regardless of which headset is attached."
This auto-resolution scheme is supported on all SteamVR compatible headsets including the Oculus Rift, Vive, and Windows Mixed Reality devices. In addition, it will also apply to the upcoming Vive Pro, which features higher resolution dual 1600x1400 displays.
Auto-Resolution in SteamVR is currently in beta, so you will have to opt-in to the beta branch by going to Tools --> Properties in the Steam Library. From there you can select the beta channel.