It’s a sort of alpha mask so the hard cut-off is indication of what will and won’t be shown and should not be made smooth, unless you want a template that slightly smooths out the border of whatever you put it. But I don’t know why you would need that, you can do that yourself too in your badge images if you really want to.
I always assumed that the template is unaliased because it represents the cutoff for where the image will be clipped. When the edge is aliased, I can;t tell if those pixels are inside or outside of the area that will be cutout.
This template is only used to unambiguously tell people which pixels are used and which aren’t. Smoothing it out would cause some ambiguity–do we use that pixel or no? If so, you’ll get a faint black outline around your badge. This matters because they will be seen against a white background.
Ideally you’d be working in an environment as close to the site as possible, so try to use an alpha mask against a white background during the editing process and delete the mask prior to upload. We take care of clipping and AA for you.
We should just remove the circle template and give users the freedom to design badges however they want. It doesn’t prevent me from uploading square badges within the circle, so I don’t see any reason to prevent people from using the full template.
I wonder why badges have to be circular? I want to use the whole rectangle for my achievement icons. If I want to make it a circle, I’ll make it a circle myself, but I don’t want to be restricted to a circle. We can make this backwards compatible by processing all existing badge sources to cut off the circular portion still, and icons going forward can just use the full space.
Besides, even without the backwards compatibility, active games will just reupload the badges with the new format to match, so this should not be a major issue even if you just completely remove the circular clipping today.