Hutter put up the prize as a way of getting people to approximate his AIXI algorithm, which he already considers to be the pinnacle of artificially intelligence. That's also why lossy compression isn't interesting. It'd be an approximation of an approximation and not particularly useful for hutter's purpose.

> his AIXI algorithm, which he already considers to be the pinnacle of artificially intelligence

This paper from Hutter in 2015 https://arxiv.org/abs/1510.04931 considers AIXI to be "subjective", since the choice of Universal Turing Machine is left unspecified:

> We show that Legg-Hutter intelligence and thus balanced Pareto optimality is entirely subjective, and that every policy is Pareto optimal in the class of all computable environments. This undermines all existing optimality properties for AIXI. While it may still serve as a gold standard for AI, our results imply that AIXI is a relative theory, dependent on the choice of the UTM.