The problem with HTML/CSS and SVG avatars is they completely fail in email and a bunch of other places where a PNG image works perfectly.. they also are a hellscape of crazy tweaky font alignment issues per browser. You can see the disussion at
As for further reducing color depth of the avatars, in my testing with ImageMagick reducing color depth, 128 colors worked best:
There was (almost) no difference in file size for 16 and 32 and 64 colors. And even 64 colors isn't enough gradations. It won't cause dithering, per se,
But even reducing to 64 colors (with virtually no file size savings) produces a worse avatar letter since the edge gradations are strongly affected.
Reducing to 8 colors does bump the file size down a fair bit, but that's an extreme. You would absolutely notice only 8 6 gradations in color between the letter (one color) and the background (another color).
That's why 128 colors was the sweet spot -- big file size savings, with zero impact on image quality.
We do generate multiple different resolutions for any given avatar @Chris_JL although given the presence of retina and higher resolution devices, sometimes it's better to use the higher resolution image.