SNES and PS1 games definitely weren't designed to look good on modern LCD screens as those definitely didn't exist (or weren't affordable enough) back when those consoles were mainstream.
When PS2 came out LCD screens was still a novelty/niche but they became very common toward the end of the console's life. Yet, more PS2 games use interlacing than anything else.
Interlacing looks bad on PAL because it flickers too slowly (25 Hz), but on NTSC I think it should look better (30Hz) and most developers only cared about NTSC during the development of their games.
The fact that some cheap modern TVs does not de-interlace properly has nothing to do with the fact old games didn't use it. There exists method to deinterlace properly, but those are complicated and computationally expensive (some may also be patented). Mostly, you have to detect movement on the screen and act differently if there is movement (update all pixels at 50/60Hz) or if there is no/few movement (update odd/even rows separately when corresponding frames are sent). I did a work of this during my studies so I sort of know what I'm talking about (although I don't know what is implemented in modern LCD TVs, but I bet you see all sort of de-interlacing techniques depending on the brand, form pure cheap crap to the top high quality algorithms).
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Did you try waiting a minute with it paused?
Yeah, some instructions appear on the screen, but I don't see how this makes it "blend 3 things together", it's just another layer on the top of the normal playfield layers, no transparency at all.
PS : Am I correct by assuming the following video modes "exists" (i.e. makes sense) on the SNES :
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*** Progressive video "modes" ***
256x240, 256x224 (modes 0-4, 7) => the most common one, everything is normal resolution
512x240, 512x224 (modes 5,6) => high H-res BGs at the cost of having no inter-BG transparency, sprites are normal res
p512x240, p512x224 (modes 0-4, 7) => using pseudo-512 H-res BG, resolution is increased "by software"
*** Interlaced video "modes" ***
256x480, 256x448 (modes 0-4, 7) => BG V-res is increased in software by changing the tilemap every frame, "by software"
Tiles should be interleaved by hand or by HDMA V-scroll updates every line. Sprites are normal res
256x480, 256x448 (modes 0-4, 7) => Same as above, but sprites have increased V-res as well
256x480, 256x448 (modes 0-4, 7) => BGs not affected, but the sprites have increased V-res (but normal H-res).
Vertical BG scrolling could look jerky
512x480, 512x448 (modes 5-6) => all is done by hardware, sprites are normal res
512x480, 512x448 (modes 5-6) => all is done by hardware, sprites are high V-res, but still normal H res
p512x480, p512x448 (modes 0-4, 7) => BGs have pseudo-512 H-res, vertical resolution increased in software, sprites are normal-res
p512x480, p512x448 (modes 0-4, 7) => Same as above, but sprites have increased V-res as well
p512x480, p512x448 (modes 0-4, 7) => BGss have pseudo-512 H-res, normal V-res, but sprites have increased V-res (but normal H res).
Vertical BG scrolling could look jerky
PS2 : Apparently some sources says pseudo-512 is used to "smooth" the screen, while Anomie says it just alternates main and sub screen pixels.
In fact I think I sort of understood, "smoothing" the screen is only one of the possible applications. If you enable colour averaging (add and half) as a normal transparency, and the main and sub screen are the same, this will not affect main screen pixels (as the average between 2 identical values is the value itself), and subscreen pixels will be averaged with the neighbour main screen pixel, resulting in a smoothing of the screen.
If, instead, a colour constant transparency is used instead, it will work like normal, and if main and sub-screen are not the same, it results in what Kirby's game does, i.e. a "software" high resolution.
I should definitely test that on hardware and improve my SNES transparency FAQ to explain this stuff.