CNET GLOSSARY: Terms for the techie
If a device can't show a certain color, dithering simulates that color by interleaving dots of similar shades. For example, shades of gray can be simulated on a printer by combining different ratios of black and white pixels. On the Web, to shrink graphics and make them download faster, designers often limit their images to 256 colors and use dithering to imply other colors.
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