As an optimization to resource pack loading, everything in the relevant directory is compiled into this atlas, rather than only those sprites which are used by the game.
All textures now have an extra pixel of padding in all four directions. This negatively impacts tiling efficiency.[2]
Mipmapped versions
Minecraft also previously generated mipmapped versions of this atlas, for unknown reasons. They are not used by the game at all - only blocks placed in the world which use the json model system use mipmapped textures.[3]. The mipmapped version no longer generates in 1.21.9.