To remove pixelation, change the interpolation method used to render raster images. In Adobe Illustrator, switching from the default "Nearest Neighbor" algorithm (which is fast but looks blocky and pixelated) to "bicubic interpolation" in the "Raster Effect Settings" significantly enhances the smoothness and visual quality.
The problem doesn't exist in Inkscape. Here bicubic interpolation is used out of the box.
Why are raster tiles used to illustrate hillshading in SVGs in the first place?
It may seem a bad idea to use 72pi raster tiles for hillshading in vector maps - but it is not. Let us explain why:
Vectorized hillshading by definition splits elevation into steps, the opposite of "shading". Therefor we use raster images as hillshading background for our vector maps. Also, we intentionally use 72 dpi raster images and not high-res images like 300dpi - it just looks better (when interpolated, see above). High-res hillshading would show too much elevation detail and look busy and distracting. 72dpi with "nearest neighbor" interpolation looks best in our experience.
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