Yes, and this is the exact same reason why we still get poor image quality nowadays. Always rendering stuff from lower resolutions, and then stretching via the hardware to something bigger, and on top of this maybe the TV is also stretching as well, because LCD certainly cannot render the rectangles pixels a CRT can. And you end up with that unsatisfactory, blurry picture, for which more blur is applied on top anytime something moves (thanks LCDs again).
When your game is native res though, it will definitely look very clean and pretty on LCD (but you will keep the movement blur though).
If we continue down this dumb road, we will eventually reach the point where we will be spending more ressources at uprezing a shitty picture than actually outputting a native res one.
My preference goes largely towards simpler visuals but done at native res and 60fps, which was exactly what arcade games were about to begin with.
It always comes down to a balancing act; there are inherent benefits to working with lower internal resolutions such as less resource/processing strain on the system itself, but only if paired with really good upscaling capabilities.
The latter of which has only become a focal point in GPU designs over the past few years, and will take time for developers to intelligently utilize. For example there are probably parts of the framebuffer that could be rendered at a higher internal resolution and other parts at a lower internal resolution relying on image upsampling/upscaling to increase the visual quality of.
This is part of the reason technologies like DLSS, FSR, and XESS are interesting; they look to answer this problem with a mixture of hardware-based and software-based implementations. But all of these are powered by AI image learning, and that wasn't a technology present with older consoles to benefit from. So, that in part has to be understood.
your average DC game doesnt look like shenmue or have individual fingers and dont move their mouths in fact most of them dont even animate the texture of their lips, the system is perfectly capable but most games didnt use that and were made with different scopes and techniques for a long time, the problem of the DC is one of perception not of the system capabilities
The actual issue is that Dreamcast never got enough market share to make it a viable platform for 3P AAA development by and large. So, Sega were the only ones really making AAA-scale games for the system with the odd one here and there from say, Capcom or such.
Visual potency of games always scales with budget, manpower and time of development. Dreamcast wasn't on the market for very long to attract enough resources in dev team counts and budgets from 3P for AAA games. So we never got to see the full potential of the hardware outside of I'd say Sonic Adventure 2, Shenmue 2 and Phantasy Star Online.
For example I think if VF4 Evolution came out for Dreamcast it would've looked about on-par with the PS2 version but maybe slightly blockier character models and some simplified lighting effects. Same if Yakuza came out for it, or Panzer Dragoon Orta. But I don't think you'd get visuals too much beyond those if we're talking AAA games pushing the hardware to its limits, and some of these games were 2003 releases.
Personally I don't think any 1P or 3P AAA Dreamcast games would've matched, let alone exceed, the AAA games PS2 and co. got from 2004 and onwards, at least in terms of overall visuals. Though given things mentioned ITT, they could have probably bested some of those games in IQ (with higher internal resolution) and color depth, or mip-mapping features that were hardware-supported. Maybe we'd of gotten 1 or 2 Sega 1P AAA games in 2004 on Dreamcast that could hang with the upper AAA games released for PS2, Gamecube & Xbox that year in most areas, but they'd be doing all sorts of crazy stuff just to do so, and probably with various sacrifices in areas like lighting, or using sprites in lieu of polygonal models for certain environmental objects that the player wouldn't need to interact with (and alongside that, using fixed/locked camera angles in certain sections to give the illusion a better shot, or breaking up levels into smaller chunks with loading times between them, etc.).
fun fact
Sega had hoped that the original Xbox would play Dreamcast titles, according to new reports.
www.digitalspy.com
Bring this up whenever people foolishly say Sony killed Sega. The buck actually stopped with Microsoft rejecting Dreamcast BC on the OG Xbox.
IIRC Sega wanted to do an actual Dreamcast 2 with Microsoft through the Xbox project, but as Xbox was always meant to propel DirectX into home gaming console space, Microsoft weren't in it to give Sega a boost.