Bluray just allows a larger resolution and a less compressed video.
If you have a 1920x1080 monitor or larger, you can play DVDs in full screen, but they'll look lower quality because they're being stretched. With bluray, the resolution of the video is higher, 1080p, so you can watch it in full screen without it being stretched, creating a better picture.

That's a picture of the new
27" iMac 30" Cinema Display (resolution 2560x1600). Each of those videos is 1080p. Since the screen is so large and high resolution, you can actually fit two on the screen at once. If you put one on and made it full screen, it would get stretched and lose quality.
Anyways, yes I think VLC can play bluray videos. You just need a bluray reader.