I’m 99% sure that the DC is supposed to have terrible dithering. Mine looks exactly like yours (both through the OSSC and directly on my TV), has dithering patterns in solid colors like the GDemu background etc. Even visible through SCART RGB. When I bought this up on other DC discussion forums, people were all like, duh, that’s like complaining an N64 is blurry, that’s what it looks like.
I guess it’s simply your TV’s AD conversion / processing blurring out the dithering patterns?