Reproduction steps:

# Open the “OpacityTest” project
# Open the “SampleScene” scene
# In the Hierarchy click on “TEST_TERRAIN” GameObject
# In the Inspector click on the “Paint Terrain” button
# Select “Paint Texture” mode under the “Paint Terrain” button
# In the “Layer Palette” section click on “Add Layer”
# Select any available texture asset
# Observe the Game view

Expected result: Grass texture is unchanged, looks blocky and pixelated
Actual result: Grass texture is changed, looks smooth

Reproducible with: 3.0.2-preview.3 (2020.3.39f1), 4.0.3 (2021.3.10f1, 2022.1.16f1), 5.0.0-pre.4 (2022.2.0b8, 2023.1.0a10)

Reproduced on: Windows 10