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From Sonic Retro

A level slot is a unique internal identity or value assigned to each act. Theoretically, there would be 65536 level slots as they are defined by a two-byte variable. However, there is a limit on the number of levels you can use, because of the way data and pointer arrays are organized. Getting around this limit requires extensive editing of the source code.

From a technical standpoint, the level slot value works by referencing a word value in an offset index, used to locate data in multiple routines, creating a global reference value to a certain set of data for a certain level (and/or act).