My concern is even with downscaling, it's likely going to look worse. You can't shove 512px of data into 256px without loss, especially not when pixel fonts are involved.
That is my concern for downscaled games as well. If you downscale with nearest neighbour resampling, you cut off pixels that'll make text hard to read.
If you downscale with some sort sampling like bilinear interpolation, the text can look fuzzy and in general, not so hot.
Still, I don't disagree with the choice to go with a 320x240 screen at all. The device is supposed to be a lower-end solution to the open handhelds scene.
The GP2X Caanoo floundered instead of flourishing, the Dingoo A320 is now considerably dated, and the OpenPandora is considerably expensive for what you might need it to do.
Yeah, it has a 320x240 screen in it. It also apparently will cost around $120-$140 to buy one. For the few games that get excluded as fitting perfectly onto the screen (some SNES, some MAME, some PSX, all N64 would be 1/2 scaled), it fits most everything else perfectly at either 1:1 or minor upscaling (NES, SNES, Sega Genesis, GBA, Neo Geo, many PSX, most all existing OpenDingux and GP2X software).
I definitely think that a future device should support a 640x480 screen though.
Assuming that a GCW Zero successor has a 640x480 screen and an Ingenic
JZ4780 inside (the dual-core 1.5Ghz successor to the Ingenic
JZ4770 inside the GCW Zero), then it should be easy to just run any previous GCW Zero software in a compatibility mode that upscales it 2x, preferably nearest neighbour.
And then such software can always be re-compiled to make full use of a VGA display as opposed to QVGA.
But that's the future, they have their reasons for picking a QVGA display for right now and I agree with them: an ideal sweetspot for retro emulation, less demand on the processor, and more affordable in mass production.