The fast tempo of the VW makes it impracticable to fully bend the knee on the first step. This forces the dancer to take the rise earlier (compared to slow waltz) which in turn produces a shallower rise-and-fall action quite naturally ("low amplitude wave" as Dronak aptly describes above).
One key measure for how much to bend your knees depends on how much body-flight you are able to reasonably sustain without "jarring" your top. This is also a function of the length of the stride between your steps 1 and 2 (e.g. Nat. Turn), and the quality of how you--and for that matter, your partner's--2nd step lands. Usually the farther you want to go, the lower your knee has to bend.
In the VW your knee goes through a range of flex--although in a smaller range than the other dances. So, yes, keep your knees flexed but (as smoothie notes above) use it to absorb or soften your movement.
To a certain extent, footwork affects how much the knees bend--specifically the length of the stride. Personally, I subscribe to the philosophy that if I (and my partner) hit the swing, momentum, and foot plant just right then the rise and fall, the quietness, and other dynamics reflecting good movement happen naturally and without much effort.
I hope this helps,
TheFryingDragon