@Floppa: once you upload it as a custom Avatar, it does not matter what you do with it on your own machine. you can even delete it from your desktop or wherever. If you change color very often, you should keep one of each color on your machine, so you can upload the new color whenever you want. You can always come back to this thread (bookmark it), and right click it to your own desktop again.

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@Ren:
Ren, This one will work, I think. I have been learning more about this stuff when making yours and Floppa's Avatars. I used a series of mathematical transformations to clear up the reduces size image, and maxed the X-dimension. The limiting fator is of course the city name, which sets the reduction amount. It is 3.6 KB, a GIF, very sharp, and clearly readable.
BTW, JPG, even at 95%, just did not do this particular graphic justice, due to the fine detail around the city and part of the name. It needs to stay GIF to look good, and a 95% JPEG is about 4K anyway, yet more fuzzy.

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Original:
3.6 KB GIF: