Definately makes sense to use a method like this to merge all the combinations. I have done similar things in the past.
The blurring I would guess is mipmapping, as was already pointed out by JFK.
You should be able to get better quality by writing a bit of compositing code with different blend modes and then mixing the bitmaps directly rather than relying on texturing/grabbing them again. You could easily write a function to read all the pixels in an image and blend them with another image. This may be a bit slow, but if it is only done on startup or initialization it really should not be too bad.
The blurring I would guess is mipmapping, as was already pointed out by JFK.
You should be able to get better quality by writing a bit of compositing code with different blend modes and then mixing the bitmaps directly rather than relying on texturing/grabbing them again. You could easily write a function to read all the pixels in an image and blend them with another image. This may be a bit slow, but if it is only done on startup or initialization it really should not be too bad.