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Shading is a term that refers to how a 3D object is lit. Lighting an object is used to highlight the depth and shape of an object, and for such a simple effect it adds a lot to the realism of the 3D scene.
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Flat shading is a simple effect where each polygon has a single shade. For high polygon objects this type of shading can be quite effective, but for low polygon objects it makes the individual polygons stand out. It is very simple to compute though, so for scenes with a lot of individual objects flat shading may be the best choice.
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