The deployment folder contains the currently deployed version of your CSS file. So, if you were to edit it, you could see changes to your running application on the fly.
The theme folder version is the project copy, which will overwrite the deployment folder version each time you deploy.
So, if you need instant feedback to your styling changes, edit the deployment folder. CSS file. If you want those changes to carry over to your next deployment, overwrite or update the theme folder CSS file.
Please note that the new DX themes are based on SASS. CSS is the result of a compilation step. For more information have a look at Setup Mendix UI Framework
I create and edit SCSS files in the theme\styles\sass\custom folder and use Koala to compile them into CSS. Then I copy the compiled files from theme\styles\css\custom\ to deployment\web\styles\css\custom\ After the copy I refresh the page in the browser. No need to deploy in Mendix. Mendix does not (yet?) recognize that only the CSS was changed and will do a full build and deploy.