Its the way your console is connected the internet.
Type1 is Open connection from you to the internet.
type2 is a moderate connection, it goes through a safe line.
typ3 is strict, the gaming experience online is very limited, to the point of not connecting to other players, mic problems, and laggy everything.
You get a type 3 mostly when you automatic configure your internet settings. (well it depends how many devices are connected to your modem/router )
Thats all I know.