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Originally Posted by Amiga Forever
Not sure about Nearest color or Error Diffusion unless u know about them  |
With "nearest color" it simply picks the nearest available color for each pixel.
With error diffusion it does the same but keeps the "error" (the diff between the closest color it found, and the real color it should have been) and "adds" it to the adjacent pixels.
I started a thread about this with a fiew pictures illustrating it, if interested:
There