From the web developer’s toolkit: building an open source image placeholder

I set out to build an image placeholder service mostly as an academic exercise. Our work at Ashe Avenue is generally revenue-focused and on a rapid schedule. Any opportunity we have to build tools on the side, either for fun or just because, we jump at. I had always assumed building an image placeholder service would be straightforward, but I wanted to know what the intricacies of it would be, and I had questions about how to make it perform: Should I generate the images on-the-fly or beforehand? Should I cache the results? How many different types of images did I really even need? And most importantly, what images should I use?