You're playing an old console which had a low res output on a TV which has a high resolution (HD), thats why it looks so bad. Beside back in the days we thought that the graphics looked good because we didn't knew any better. I'm using the smooth video option and the games look very good, the PSX emu had an extra graphic enhancer option when I used that option the PSX games did lag. Maybe it works better on a overclocked Pi. Some games look very good pixelated, for an example Donkey Kong Country 2 on the SNES looks very good without the smooth option.