This tool is designed to intelligently weigh the pixel colors of the selection or active layer and reduce the number of colors while maintaining a semblance of the original image characteristics.
Here, “level” means “number of colors per channel ”.
This slider and the input boxes with arrowheads allow you to set the number of levels (2-256) in each RGB channel that the tool uses to describe the active layer. The maximum total number of colors is the combination of these levels. A level to 3 will give 33 = 27 colors.
The Preview checkbox enables the rendering of changes right on the canvas for immediate evaluation.