Mode 3
 

What is it?

mode - integer - the image drawing mode (0 - add, 1 - transparent, 2 - subtract, 3 - daynight)

Perhaps it's drawn below day/night effects (seteffect())? That's my most logical guess. I don't use images that often.

Does it have to do with backpals? Are backpals "drawn" like images? I have no idea.

backpals aren't even supported anymore, and this mode is more 'recent'. When mode was added, it was just 0, 1, and 2. Mode 3 was added with Graal 5, or something like that.

As for drawing below day/night... I highly doubt it. Modes are used to change the effect of the alpha value, and you can already draw stuff under/above daynight by changing its layer.

I was thinking backwards compatibility, or are they so unsupported that they simply no longer work?

I think they no longer work.

Mode 3 is daynight so that you can do your own daynight effects. Red,green and blue are added on top, and alpha is subtracted from the background. Basicly you can make the background darker and add some colors on top. It's mainly meant for polygons.