Okay easy one
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so let''s say you have a 32bit color texture
you size it down to 8 bit
going to look like shit
now, you find the most useful colors of the image
at the beginning of the file you put the palette
it is such a thing :
0x00 = FF 00 00 FF
0x01 = 00 FF 00 FF
0x.......
Well, it is not given as clearly, it is given binary, like a pallete (it''s a palette)
so, in your image you sized down to 8 bit paletized
every pixel value which is 8 bit corresponds to a predefined color, the color of the palete
you you have 256 colors, but the one you need
It is perfect for sand, lots of shades of yellow
along for everything that has a few colors
skies, floor, metal textures
will only look shit if you use the almost the full spectrum
Get it ?