I think I'm going to be using something like this for that old LCD feel.
██████ #c4cfa1
██████ #8b956d
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This is a pretty great website for figuring out color palettes based on one hue: http://paletton.com/
AND! Here's some cool 4-color combos for Super Mario Land 2:
To be a bit more specific, you essentially got one background color (the brightest one) and three darker tones to draw on top. You can't really draw with the background color.
For alpha transparency you can fake alpha by letting your sprites flicker (visible/invisible) between frames, which was rather common back then.
I think one could even add blending between frames to improve the effect, since the original Gameboy had quite some ghosting going on.
So in some way you can have alpha, but you'll have to fake it, if you want to stay authentic.
Best part about this is if you add CGB support you don't have to bother with the second VRAM bank, you can just tweak the tints to your liking. However, you no longer have the BGP/OBP0/OBP1 registers so you'll have to do everything through the main CGB palette (in other words, fades will be different), and you'll use a different attribute bit to select the sprite palette.
