What is the difference between squashing and deleting a commit in git?

Suppose I do

git rebase -i HEAD~3

and the following opens up in a text editor:

pick ae27841 Commit 1 
pick fd8a71e Commit 2
pick badd490 Commit 3

I want to convert these 3 commits into 1 commit so I can push that commit to my repository and then call a pull request. I understand that there are 2 ways to go about this:

1. I can leave one commit as pick and squash the other two. i.e

   pick ae27841 Commit 1 
   s fd8a71e Commit 2
   s badd490 Commit 3
   

2. I can delete 2 of those 3 commits . i.e.

   pick ae27841 Commit 1 
   

What is the difference between these 2 commands? As I understand it, each commit is a different version of the project. Hence my latest commit will be my latest version right? So my latest commit is all that I need to keep. Since the other 2 commits are 'older' versions of the project, I have no need for them and so I can delete them. So is method 2 the correct way to go about converting my 3 commits into one? If so, what kind of a case will I need to squash my commits instead?

What is the correct way here? Squashing or deleting commits?