So just what is the optimal way to watch this show

There sadly isn't one. The 4:3 Blu-Ray remasters are about as good as it gets in visual quality, but there's a "cinematic" feel lost from the 16:9 DVDs, but the quality difference is noticeable and unfavorable. It's a bit of a dealer's choice at this point if you want "best available quality" or "best available widescreen."

Babylon 5 was filmed at a weird moment where they were prescient about HD TV and the coming widescreen home television boom and planned for/shot for 16:9 releases, but also had to shoot and composite first and foremost for 4:3 to meet TVs where they were. They had even had plans to preserve the special FX masters to make it easier to recomposite the show. WB's Archives team lost those files at some point. (The general story is WB Archives sent a copy of the masters to Vivendi [Sierra, proto-Activision Blizzard] for the eventually cancelled videogame and discovered they sent the original copy by accident only after Vivendi claimed to have wiped their copy out of respect for the contract terms when the game was cancelled.)

Take it from someone who saw it when it first aired on standard definition analogue TV: it doesn't really matter all that much. The performance of the actors and the story is what's important!

With an AI filter overlay of the cgi sequences?