Reproduction steps:

1. Open the “OpacityTest” project
2. Open the “SampleScene” scene
3. In the Hierarchy click on “TEST_TERRAIN” GameObject
4. In the Inspector click on the “Paint Terrain” button
5. Select “Paint Texture” mode under the “Paint Terrain” button
6. In the “Layer Palette” section click on “Add Layer”
7. Select any available texture asset
8. 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