So this is basically just vertical interlaced? That worked fine on old TV's because the way they worked meant that the interlacing got ignored and the frames blended fine. I suppose this temporal blending is the modern equivalent of that!
But... it's a slightly weird existential question. At work whenever we render sequences that are particularly heavy, we tend to only actually render every other frame and then see well it blends using a frame blending algorithm. Some of them work literally flawlessly, where comparing them to an actually rendered sequence offers no difference. Some work terribly and it turns into a mess. The algorithms are complicated, but they work - mostly - on a purely pixel basis. There is not additional information and even for pure CG we don't provide it with any other information (like velocity data) that could potentially make its calculations more exact.
I assume, however, that KZ does. It has all the information - if it's rendering what is effectively half a frame, it knows where all the objects are on the screen, it knows where the shadows are falling (hohoho), it knows what objects are moving and what are static, how much the camera is moving etc. What it doesn't have to do is actually sample the pixels, AA them and all that gubbins. As such, I imagine that their ability to actually do this frame blending stuff well is very, very high (and the proof is in the output, obviously). It also leads to the question of "what counts as 1080p"? Afterall, the machine is outputting 1080p and whilst half of the frame is "made up", it's "made up" using a load of very useful data. It'd be easier to count the things it's not doing than the things that it is. Some games - like KZ Mercenaries - render certain effects at a lower resolution and overlay them onto the higher resolution main render. What resolution is that? It's all CG. It's all computer generated. I can understand why a 720p upscaled to 1080p can't be called "true" 1080p, but this? I dunno. I think it's more complicated than just "It's only rendering half the pixels".
Edit: This is all based on my understanding of the tech, which may be wrong.