>>105632989
>>105633886
I assume you aren't booting from the ISO? Beginner's mistake.
In-place upgrades are (logically) meant to be conducted from a running windows installation.
Launch setup.exe (or setupprep.exe - this one should directly handle in-place upgrades IIRC - 'twas what I did back when the windows 10 upgrades happened in 2015.)
You aren't running the OS from officially unsupported hardware, are you?
>>105633961
Nah, desktop wallpapers are transcoded & recompressed to JPEG, when set within Windows settings.
You'll have to set the JPEGImportQuality DWORD value (located at HKEY_CURRENT_USER\Control Panel\Desktop) to 0x64 (hex), which is 100 in decimal. Reload explorer.exe afterwards.
Also check your image viewer - see whether it is capable of setting a desktop background, bypassing the image compression. I know IrfanView does.
Make sure the bubble background is the real deal - so a .bmp file with the pattern, and set the desktop background fit to tile-mode.

>Is this the power of CRTs?
I'd expect the CRT display to smooth out the artwork nicely.