This tool is designed to intelligently weigh the pixel colors of the selection or active layer and reduce the number of colors while maintaining a semblance of the original image characteristics.
Here, level means number of colors per channel .
This slider and the + and - buttons allow you to set the number of levels (2-256) in each RGB channel that the tool uses to describe the active layer. The maximum total number of colors is the combination of these levels. A level of 3 will give 33 = 27 colors.