Deformation by Armatures can be done with either Vertex Deform Groups, or by using a Bone's "Envelope". (At this moment both methods are mutually exclusive. When a Mesh has Vertex Deform Groups, it doesn't use the Bone Envelopes. The purpose of this is to allow both methods to be set per Bone, and optionally to have both working on top of each other).
Bone Envelopes in Armatures can have three values set to denote their deformation distances:
Bone root radius
Bone tip radius
Both values are drawn as solid 'bones', all vertices within this bone are deformed 100%.
Bone distance
This value defines the volume outside of this solid 'bone', where the deformation effect gradually (quadratic) deminishes to zero.
You can view the Armature Envelopes by setting the Armature Drawtype to "Envelope", in the Editing Buttons, Armature Panel. This draws in wire as well solid, and in PoseMode and EditMode.
In the image above you can see the Envelopes in EditMode, solid. The transparant white blend around the selected Bones denote the "soft" Bone distance.
Editing envelopes in Edit Mode: (only with draw type "Envelope")
- Scaling (S-key) scales the bone's root or tip radius, whichever is selected. If the entire bone is selected, then the both root and tip radius are scaled.
- Pressing ALT+S scales the soft distance area when the whole bone is selected.
Editing envelopes in Pose Mode: (only with draw type "Envelope")
- Press ALT+S to scale the soft distance area.
Note that the soft distance area only draws for selected Bones.
With a Mesh being in "Weight Paint Mode", you can now select Bones of its associated Armature (but only when the Armature Object is in Pose Mode).
In WeightPaint mode, you can also edit the soft-distance deformation of Bones using the ALT+S hotkey.
Press Wkey to apply the Envelopes of selected Bones to its Vetex Deform Groups. This option also creates new groups, if they didn't exist yet.
The images below show two examples of using this tool:
When you Parent an Armature Object to Mesh, the menu option that pops up "Create Vertex Groups" also uses the Envelope data.
Note that editing the "Weight" value of each Bone still works on top of the Envelopes. This provides a final tweaking option to further refine skinning.

Painting weight values on vertices now supports the following new features: