Short answers, pulled from the story.
The palette system is a technique that allows early computers to display complex images despite having severely limited memory. It uses a color lookup table or CLUT to assign specific colors from a vast color space to simple numerical indices. This method became the standard for indexed color images and allowed the 256-color palette commonly used in the GIF file format to represent images originally created with 24-bit color depth.
The palette system foundation was established in 1987 when a single pixel on a computer screen could be described using just 8 bits of data. This contradiction formed the basis for the technique that allowed early computers to display over 16 million colors simultaneously despite limited memory. The solution lay in the color lookup table which assigned specific colors from a vast color space to simple numerical indices.
A master palette is a unique common master palette that can display any kind of image with reasonable accuracy by limiting the possible levels of the red green and blue components. An adaptive palette selects or quantizes colors directly from the original image to create a custom palette for that specific picture. While adaptive palettes allow indexed color images to nearly match the original, they create a heavy dependence between the image pixels and its adaptive palette.
A single palette entry in an indexed color image can be designated as a transparent color to allow simple video overlay operations. The transparent color usually has index number 0 and allows one image to be superimposed over a background. This technique was used for pointers in typical 2-D videogames for characters and bullets and for video titling and other image mixing applications.
Microsoft Windows applications manage the palette of 4-bit or 8-bit indexed color display devices through specialized functions of the Win32 API. The system palette is a copy in RAM of the color display's hardware registers and serves as a unique shared common resource of the system. When an application sets its own logical palette the system tries to match the logical colors with physical ones and applies an internal algorithm to discard the least-used color if the intended color is not present.