The LCD panel in the G4 iMac is only 6 bits per pixel, compared to 10 bits per pixel on a modern Macbook Pro or similar, so the banding is just the dithering required to display the gradient shadow
It's most definitely a LM171W02 panel in the iMac G4 which is definitely a 6-bit panel, you can see the specs here: https://www.panelook.com/modelsearch.php?keyword=LM171W02&se...
all of the LM171W02 panel family are 6-bit (notice the colors column lists 262k)
I wouldn't say they lied so much as they obfuscated the truth; the machine supported millions of colors, and with dithering techniques the monitor could look like it was displaying quite a lot of colors, but only the 20" display could display millions of colors without dithering (which was just like basically every other TN-based machine and display of the time)
Thousands and “millions of colors” in the control panel came from the CRT days. Guess they didn’t have the heart to reduce that just because the display device didn’t fully support it.
The LCD panel in the G4 iMac is only 6 bits per pixel, compared to 10 bits per pixel on a modern Macbook Pro or similar, so the banding is just the dithering required to display the gradient shadow