The MUD I used to play on hardly had any colors at all, which was not necessarily a bad thing.
The MUD I'm currently creating, I believe we will have a bit of color displayed through a few colors, but very minimal. And with a certain amount of points gained through roleplay the immortals will be able to restring color into items for players.
I think too much color is too confusing and I usually don't bother playing MUDs with such.
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