8 bit psuedo color, so the color palette switched with every focus-follows-mouse window boundary crossing. 16 bit direct color with banding but no more palette psychedlia.
This was equal parts to make it faster and to allow for higher framebuffer resolutions with limited VRAM.
Back then you did what you could with graphics and it wasn't a lot. After I got a PC I had indexed color for a long time and working with indexed color was pretty rough because anything physics-based like rendering or raytracing was going to be difficult. You could render a photo pretty well with 256 carefully chosen colors and dithering but if you wanted to, say, composite two photos and do general sorts of things you'd need to convert to "true color", do the math there, then re-quantize for display.