The secret behind (octopuses') color capability is special skin cells called chromatophores. Each chromatophore consists of three bags of pigment. By squeezing or expanding the bags, octopuses can change the color displayed by each cell, allowing millions of subtle combinations. And since each cell is controlled separately, they can create remarkably sharp displays. In addition, reflective coatings under the cells help enhance the effect.This actually sounds quite similar to the method used by some of the e-ink designs.