I despise this issue as well.
Dropbox app also blows up any image to fill the screen, and pixelation occurs on any photo, image, icon, etc that is smaller than full screen.
this is a huge issue that needs fixing.
I use my iPad to look at and show iOS icon designs, and having them blow up to full screen is terrible.
I cannot believe that both Apple and Dropbox has not fixed this issue.
The only way to view smaller graphics (have not actually tried it with photos) is the app GoodReader, which is a Godsend.
Fix this, Apple...Dropbox would most likely blame Apple for their similar issue...