No, not always: when XFree86 and XWayland are out of the picture (i.e., when the app is talking directly to the Wayland protocol) there is no downscaling or upscaling at all.

So, for example on Fedora 34 (my daily driver) if you say

gsettings set org.gnome.mutter experimental-features "['scale-monitor-framebuffer']"

, then a new line (named "Scale") appears in the "Displays" pane of the Gnome "Settings" app. If you use that new line to set the scaling factor to 125% or 150% or 175%, then start google-chrome-stable or google-chrome-unstable with the flags -enable-features=UseOzonePlatform and -ozone-platform=wayland, then navigate to the page containing this comment, the "Y" in the upper left corner is a little blurry -- enough so that most people with non-hiDPI displays should be able to tell -- but everything else on the page, including the white box around the white "Y" and emphatically all the text is rendered directly at the correct resolution.

This is because on a modern OS, the fonts are stored as resolution-independent mathematical descriptions of curves (splines, to be exact) that can be rendered cleanly at any resolution. And rounded corners specified by browser CSS or in GTK 3 or GTK 4 (the versions of GTK capable of communicating directly in the Wayland protocol) are specified in a resolution-independent way. And if the aforementioned white "Y" were a SVG file instead of a PNG file, it wouldn't be blurry either (but don't bother changing it, dang, it is fine the way it is).

And all the Gnome apps, e.g., the aforementioned Settings app, e.g., Gnome Terminal, on my install are non-blurry at fractional scaling factors.