Web Design in a Nutshell, 3rd Edition

Transparency

Both 24- and 8-bit indexed color PNGs can have variable levels of transparency. This sophisticated transparency function allows for smooth transitions between foreground and background elements (Figure 31-1). Transparency works for grayscale images as well. PNGs also support simple binary transparency (like transparent GIFs), in which a pixel is either totally transparent or totally opaque.

PNGs use two methods for handling variable levels of transparency. The first uses an alpha channel (think of it as a separate layer) that keeps track of the transparent areas of the image). The other method works for 8-bit indexed images and uses the index color table to store transparency information.