VDPAU is the interface that the Nvidia drivers use to offer hardware video acceleration, so yes, you need to have VDPAU installed. No further configuration is needed, except that you have to tell VLC in its Settings dialog to use VDPAU. Haven't tested the latest versions, but last time I tested VLC was buggy with VDPAU, you might be better of with using MPlayer (or one of the Players that build up on MPlayer, like SMPlayer, if you want to have a better interface).
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