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GIF, 'Graphics Interchange Format' was introduced in the 1980s on CompuServe to allow high-quality, high-resolution graphics to be displayed on a variety of graphics hardware and was intended as an exchange and display mechanism for graphics images. The rise of the Internet and in particular the web saw GIF usage explode.
Saving a photographic image as GIF firstly achieves a 3:1 compression by a reduction in color depth from 16 million colors to 256. A GIF graphic is stored as a sequence of pixels with 256 color values from a image specific color palette.
Dithering reduces the visual impact of the reduction in number of colors. This raster data is then compressed according to the LZW algorithm (Unisys patented).
GIF does significantly better than JPEG on images with only a few distinct colors, such as line drawings. Not only is GIF lossless for such images, but it often compresses them more than JPEG can. For example, large areas of pixels that are all exactly the same color are compressed very efficiently indeed by GIF. JPEG can't squeeze such data as much as GIF does without introducing visible defects.