Is this by design? What is best practice? I was thinking that if someone lands on a page via Google and the image is blurred, they may just bounce straight off the page.
The issue is that the attachment appears to have a width explicitly applied to it. That could've been from it being resized in the editor, I'm not entirely sure. (I don't get one when pasting an image in, though there might be different paths for this.) That width is then used even for users that can't view the full size image due to permissions.
So two options: 1) allow guests to view attachments; or 2) remove the width from the attachment in the post. You can do this by editing it, clicking on the image and selecting the change size option from the popup:
I've actually just made a change in 2.2 that will explicitly ignore dimensions on attachment thumbnails in this situation, so that will avoid the scaling issue in the future.
I think everybody has misread my initial post. I already know how to make sure its not blurry to guests. I am talking about what is best practice, to show blurry or non-blurry to logged out visitors.