system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: How do games with 2-bit color have transparency?

2 bit color gives you four possible colors. Pokemon Red and Blue use white, light grey, dark grey, and black. But the sprites also have transparency. Where is the "transparent" color stored? (edit: since all 4 bits are already taken?)

For instance, in RGB that also includes transparency, the colors are stored with two extra alpha bytes (Red,Green,Blue,Alpha) vs without transparency as just (Red,Green,Blue).
gpt
One of the four "colors" is allocated as transparent.  There's another bit that can say what transparent should be represented as, which in Pokemon's case is represented as white.

So for Pokemon, the color scheme is not white, light grey, dark grey and black.  It's transparent, light grey, dark grey and black.  Transparent is represented as white.

Backgrounds don't need transparency, so they can get the full white, light grey, dark grey, black color scheme.