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Cel-shading, sometimes misspelled as 'cell shading', is an animation technique in which three-dimensional objects are rendered to appear two-dimensional, as if hand-drawn in the same manner as a cartoon or comic book.
However, just because an image maintains this appearance or has a sharp outline, this does not necessarily mean it has been cel-shaded. The difference lies in the methods of lighting which have been employed, using a limited number of color shades depending on depth of view and calculating values for each individual pixel accordingly.
The first video game to feature this style was Doctor Hauzer for the 3DO in 1994. However, it was in 2000 that the style first gained prominence, with the release of Fear Effect for the PlayStation and especially Jet Set Radio for the Dreamcast.