> so I saw there's a feature to make palettes from images, so this isn't text then, right? it's images.
Correct, palettes are images. Try opening any of the PNG files in the palettes/ subdirectory with an image viewer, you'll see colored blocks. Playscii doesn't use any other format for palettes.
"Palette from image" in the Char/Color menu generates this kind of block color PNG based on the colors present in whatever source image file you point it to.