If a dynamically-added layer will have a different projection (SpatialReference) than the map as drawn, then this property can be used to smooth lines projected to the new spatial reference. If the map has the same coordinate system as the layer's data set, then this property will have no effect.

The process of data densification adds points to a layer before the layer is projected. DensifyTolerance sets the interval used for adding points.

DensifyTolerance does not need to be used if all layers in a requested image return all data correctly after being projected. Using DensifyTolerance can slow down the ArcIMS Spatial Server noticeably. Use it only when features are missing from one or more layers, usually around the periphery. It is better to start with a large number for tolerance. A guideline is to start with a value about 20 to 30 percent of the distance between the minimum and maximum x-coordinates of the current map extent.

Reference