From Mickey Thompson's site:
What Is a Dynamometer?
'Meters measure things', and in this case, energy and torque. Technicians usually refer to this machine as a "dyno". A Dyno applies simulated load on an engine (like when a car is driven on the road or track). Most assume that the dyno is measuring horsepower but this isn’t exactly the case. The dyno calculates power, and to do this the dyno needs to know the amount of torque being produced as well as rpm. A dyno will measure torque using load. Once the dyno knows the torque and rpm, it then calculates the horsepower. And at the same time, the dyno will log this data. There are two main kinds of dynos; roller and hub.
The roller or chassis dyno is when a car is mounted to a large roller(s) via straps. The rolling or chassis dyno can experience the effects of tire slippage, which however, does not affect an axle hub dyno. The axle hub dyno attaches directly to the vehicles drivetrain, by means of wheel hub adapters.
Technicians require no straps for the hub-style versus the need to strap down the vehicle on a rolling mount. With those straps, parasitic tire losses are noticed, (horsepower numbers can get skewed depending on how tight the straps are), whereas the axle-hub version is unaffected.
Testing with a chassis dyno can be repeated, but as traction changes, it affects the consistency of reporting. With the hub dyno, the ability to repeat testing loads is exceptional.
When a tire spins at a high rpm, it has large amounts of inertia.
Think of a giant steel drum spinning at the same speed, it will have more inertia than the tire, due to its size difference. This is effectively like having a giant flywheel attached to your engine, which puts unnecessary and substantial load on the engine to spin it. And so some of that energy is being wasted trying to accelerate this roller/drum. It can be also hard to pin-point small fluctuations due to this cumbersome load. Hub Dynos are also excellent at performing NVH tests (noise vibration & harshness tests) since they are quiet in operation and there is no roller noise.
Since the Dynomite Hub dyno has no inertia, it can control acceleration through hydraulics. It is not reliant on the speed of the roller drum.
Most serious engine builders prefer engine dynos over chassis dynos since there are no variables. Hub dynos allow the same reliability, by bolting the dyno directly to the axle/drivetrain.
The hub axle dynamometer was designed to be fully portable and, thus, more versatile.
There is also no risk of a vehicle coming off the dyno, due to strap failure at high speeds.
Engines make horsepower, but also experience parasitic losses as with any heat energy transfer. A dynamometer provides a measurement for energy, and the effective transference of that energy. So eliminating as many variables (losses) as possible, (such as tire slip, pressure, temp, and rolling resistance) is the most desirable way to execute repeatability.
Here is a short video from Dynomite, using their Hub Dyno: