The C64's VIC-II has 16 hardware colors, but by dithering two colors in alternating patterns, many more effective colors can be produced. On PAL systems, the TV's delay line physically averages the chroma of adjacent scanlines, so alternating-line mixes are true signal-level blends, not just optical illusions. Combinations with equal luma (23c) blend seamlessly; as the luma difference grows, the dithering pattern becomes increasingly visible.
Based on Pepto's work.
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Link to this Palette
Colorspace Diagram
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Palette