Quantization is the process where the sampled analog input voltage will be replaced with an approximation from a finite set of discrete values. It is also called as rounding. The LSB is determined if input analog voltage lies in the lowest step of the input voltage range.
For example, when VREF = 2V, Resolution = 3-bits, the whole range is divieded into 8 steps. Analog Input voltage from 0V to 250mV is assigned to the same output digital code 000 and voltages from 251mV to 500mV is assigned 001. This process is called as Quantization.