The Posterize Effect changes a video so that it looks like a poster or canvas drawing. This effect, when combined with the Transparency transition, can give a watermark overlay to your videos. Technically, posterization is reducing the number of color levels per color channel from 256 to some smaller number. Reducing the number of colors produces bigger areas of "flat" color and less shading.
Levels per channel is the number of color levels to use for the posterization operation. The value of this slider ranges from 2 to 20.