Color ramps are not limited to 256 different colors, but are instead computed from analytic expressions. This results in much smoother gradients. The above image uses one of the built in color ramps, but you can type in the expressions as well.
An additional twist is that color ramps can also define the transparency.
Simple Mathematical constructs.
Plotting a simple cosine wave, colored by height. This is done with three variable
modules and one drawing module. The next three images show the same surface, but
different drawing commands.
Colored with a scalar field + color ramp.
Colored with a bitmap.
Made semi-transparent by setting the opacity level in the drawing command.
Take a look at the examples and tutorials.