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In preferences click the Video button and set Output to "D3D11 video output".
Next, click the Input/Codecs button and set Hardware-accelerated decoding to "DirectX Video Acceleration (DXVA) 2.0". Save, exit and restart vlc. This combination works best for me.
Incidentally, both your images look the same to me. They're both blurred (and no, I haven't had too many beers today)