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Rainbow gas is a special gas which acts like drugs for Squidjits, causing them to become drowsy and care-free, even being okay with Sleepyhead consuming them. Rainbow gas acts like a steroid when consumed by Sleepyhead, although they can cause him to explode if he consumes too much.
Andrei also absorbs it and becomes empowered by the effects of the gas, but also made him and his people sick.