What is an ICO file?
ICO is the Microsoft Windows icon container. Unlike a PNG, a single ICO file can hold several images at different resolutions. Windows, browsers and other apps automatically pick the layer that best fits the space — 16 pixels in a browser tab, 32 in the taskbar, 48 on the desktop and 256 in large icon views. That is why favicon.ico is still the most widely supported favicon format.
PNG vs. BMP layers inside an ICO
Each layer can be stored as a classic 32-bit BMP (DIB) with an alpha channel and AND mask, or as compressed PNG data. PNGToICO's Auto mode uses BMP for small sizes, for the widest compatibility with older Windows versions and tools, and PNG for the 256×256 layer to keep the file compact.