How the picture becomes pixel art
Pixel art is drawn on a small grid with a handful of colors, like the graphics of early game consoles. The tool first shrinks your picture to the grid width you choose, averaging the colors of each cell, then maps every cell to the nearest color of a limited palette.
With Automatic the palette is built from your own picture, so a sunset keeps its oranges and a forest its greens. Fewer colors give a bolder, more graphic look; 8 to 16 colors is the classic range. The swatches under the preview show every color that ended up in the image.
Retro palettes and dithering
Game Boy uses the four greens of the original handheld, PICO-8 the 16 fixed colors of the fantasy console, and Grayscale and Black and white give a print or e-paper look. Dithering mixes neighboring palette colors in a checkered pattern to suggest shades the palette does not have. It makes smooth gradients like skies look better, while clean logos and icons usually look sharper without it.
A crisp PNG at any size
The downloaded PNG is enlarged without smoothing, so each pixel stays a perfectly square block. Pixel size sets how big each block is; by default the long side is about 1024 pixels, a good size for sharing. Grid lines draw a thin line between cells, handy as a pattern for bead art, cross stitch or mosaics. Transparent parts of a PNG stay transparent.