Glad you got it working and yes, you have understood everything. There are several reason for dmddevice.dll to exist - not, only via dmdext does it provide "hacks" to use your dmd for other games. But, one of the other benefits is that since its a dll ( dynamic link library ) it is completely un-related to what the main developers are doing. Makes life a bit easier for them is important, because it benefits us all.
Yes, the big change is when you have a patched rom and its matching palette file. Normal - non Stern ones are 4 "shaded" orange. And that will never change. Some people have made available these palettes so you have an alternative. If you don't like it - rename the folder or delete the palette and your back to normal ( well, registry might hold some info still ).
So, I guess. If you don't have patched roms, or don't like the way those palettes are colored your back to normal.
Personally, I like a few of those provided ones, but, often revert to choosing my own color. Eg. blue and shades there of.
Edit : To your question about editing. No, the only edited stuff are if the roms themeselves have been, frame by frame colorized. I guess you can say, the 4 color roms can't be edited. Well, they can - but, only by saying that the default orange #1 is now blue. #2 color is now read. etc. Nothing more than that. That info is in the palette files instead of the registry. One advantage. What if you reinstall your cab and forget a copy of your colors that you have set in registry ? Palette files is the answer.
Edited by Thalamus, 02 April 2017 - 10:18 PM.