Haha, this was the first thing I tried with the LOS plugin :P
The thing is, you have to have smaller sprites if you want to avoid the blockiness, but then you'll probably kill performance. Chucking all of the sprites on their own layer and adding a layer effect of blur horizontal and vertical helps reduce the blockiness to some extent, but it's still pretty chunky.
There's probably some fancy stuff that one could do with the canvas plugin, and using a lot of sprites as nodes to build a gigantic polygon, but that kind of stuff is a bit beyond me.