Mipmaps are copies of the original texture that are saved at lower resolutions. You can think of mipmapping like the equivalent of Level of Detail (LOD), but for textures.

Based on how much texture-space a fragment occupies, you can select an appropriate level for sampling. When an object is further from the camera, a lower resolution texture is applied. A higher resolution texture is applied when an object is closer the camera. The following image shows a mipmap collection containing the same texture at different resolutions:

Best practices

Make sure that you use mipmapping. This is because mipmapping improves both performance and quality. Mipmapping improves the performance of the GPU. This is because the GPU does not need to render the full resolution texture on an object that is far away from the camera.

Mipmapping also reduces the texture aliasing and improves the final image quality. Texture aliasing causes a flickering effect on areas that are further from the camera. The following image shows texture aliasing on the same texture both with and without mipmapping:

Unity automatically creates mipmaps as they are needed on import. Unity then rescales textures that are not power of two. More information on this can be found on Unity's website

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