From WikiBrite: The Rainbow Brite WIki
Ponds located below the
Color Caves. As water washes past the mine,
Color Crystals are washed down to the ponds. Sprites continue mining for the smaller gems by rinsing the dirt in screens and uncovering Color Crystals. Of course, since the water comes from the color caves and contains magic Color Crystals the water reflects a rainbow or prism feel within the water, giving the "Prism Ponds" their name.