The DTM Contours function has the advantage of speed on large sites. The processing time is more or less proportional to the number of data points on file, and is therefore the preferred system for large areas. For small sites, Generate Contours (from the line model) is more efficient.
When a DTM contour is tracked, the coordinates that are saved are the grid intersections and diagonal intersection of each grid square through which the contour passes. This is much more data than the Contours from Lines system, which only retains the polygon boundary intersections. However, to plot contours generated from lines it is usually necessary to smooth them. This, in turn, results in an aesthetically pleasing picture but much larger files than those of DTM Contours. Therefore, it is frequently found that DTM Contours are a manageable size to pass to a CAD program, while smoothed Contours from Lines files are not.
Because the grid data is derived from the original information, they only represent an approximation of it. This has the advantage of a natural smoothing effect, and the disadvantage that contours can sometimes be found slightly out of position. This is not normally significant, but it can be annoying if the movement puts the contour just to the wrong side of a plotted elevation. The finer the grid, the less significant this problem will become.
An undesirable symptom of contours generated through a regular grid is 'jitter', which can occur when a contour tracks along the edge of a design platform or some other flat surface. This is a result of the tracking routine trying to contour a flat surface. It only occurs when both the contour value and the flat surface have the same elevation. This effect can be reduced or eliminated, by specifying a smaller grid spacing when the DTM is generated and avoiding designed surfaces at exactly the same elevation as contour lines.
To summarise, DTM Contours is a less precise but more reliable system of contouring, that is well suited to producing contours of large areas. Contours from Lines produces precise contours that are aesthetically pleasing but at the expense of processing/plotting time and larger file sizes.
Because each segment of a contour line derived from a grid is usually very short, smoothing the line in the plotting process will have virtually no effect and is not normally warranted.