Remember the Cloudy, Blurry Avatar issue that Nyx Linden was working on? Nyx says they are making some progress. They have some work-around fixes for a subset of the issues that is running on Blue Steel. This would be the pre-rendered avatars in the inventory thing.

There is a team working on a general fix for blurry avatars. But, Nyx says they are not far enough along to be ready to say anything about that. I suspect that means they are experimenting with a collection of fixes to see what works best and what side affects the fixes may have.
So, while we don’t know much, we do know the Lindens are working on it.

