Wirelessly posted (iPhone: Mozilla/5.0 (iPhone; U; CPU iPhone OS 2_2_1 like Mac OS X; en-us) AppleWebKit/525.18.1 (KHTML, like Gecko) Version/3.1.1 Mobile/5H11 Safari/525.20)
I've also had grainy YouTube quality videos over 3G. I don't know the cause, but hopefully things will improve soon.
about the topic: there are comments that iphone via wifi streams hd content if available from youtube; this may be a factor for longer waitings on buffering.
i don't want incentive anybody to jailbreak; but some features like mxtube (can download or stream either low and high quality videos from youtube) is a excelent alternative for those who don't like to watch waiting indicators.