Diminishing returns stat is a stat converted into a passive skill(that cannot be upgraded, only added by items).
Instead of e.g. stat being linear, its a converted to floating point bonus from 1 to nearly 100.
Example1: Resistance to Fire stat in percent converted to skill "Fire Resistance"
items add +n to Skill level which select percent of Fire resistance, which can't reach 100% due Diminishing returns formula applied by the skill bonus for each next level.
Example2:Chance to hit stat, usually from 0% to 100% converted to "Accuracy" skill, each level slowly decreases bonus to Chance to hit, never reaching 100%.

Note for non-percent stat. the Diminishing returns will cap the skill at 100% of value X chosen as multiplier(e.g. skill 5.6% of X at level y).

see http://videogamedesign.wikidot.com/mechanic:diminishing-returns for percents
see http://videogamedesign.wikidot.com/rpg:skill-passification for skill passification as a concept.

Primary stats (like dexterity) where player spends stat points should instead give exponential bonus(e.g. Base_value *(1.01^Points_spent)).