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In your retroarch.cfg add:
video_smooth = true
That did the job for me, I didn't like the blocks at all. This will smooth it out and it will look pretty nice. Just try it out. BTW I'm playing on a 40 inch tv (Sony KDL-40EX500)
The lack of free GPU memory caused it. So either keep your split higher as you have done, or use a lighter theme like Carbon.