PC Engine (TG16) games are so colourful! I wish more modern games use bright colours like they used to do.

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Question that might sound dumb.

Were they actually this vibrant back then or were they made more vibrant to make up for limitations of a CRT?

Little bit of A, little bit of B. The sprites were also designed with CRT limitations in mind so they generally look better than they do on non-crt screens

Things like stippled dots or vertical lines especially would blur into each other making new colours or faking transparency.

Random video to demonstrate it. https://www.youtube.com/watch?v=IthGu6Ysmpc

But if your TV was too good, you wouldn't get the effect as much.

Nope, they weren't. But there were definitely differences whether you played on a Sony Trinitron or a cheap TV. Hell, I even played some games on black-white-TV when the color TV wasn't available.

The system could only display 400-something colors at a time. Once you reduce the number of colors that can be used, you lose gradients so one color doesn't ease into another color. Due to this, art styles were typically different and used contrast to "pop" the characters and items visuals in game since being more realistic wasn't an easy (or possible) option.

Now that we can have millions of colors, you can do whatever style you want.

A similar thing happened as polygon counts went up.