I don't know what the yellow dots going across the screen are. When you got into stock recovery, did you press both the vol up & down same time to access the menu (with power key to select)?
I would install RSD Lite & the drivers on a PC, then find your generic Froyo rom from here:
xda defy wiki page
I wouldn't go back to 2.1 as you might not have downgrade ability.
You hold power key & vol UP to enter bootloader mode. Connect to PC & wait while all the various drivers install. Get the Froyo rom (full flash .sbf file from the link above) & put it in the same folder as RSD lite on your comp (program files, rsd lite...). Open RSD & load the .sbf file, then flash it.
This will take some time (10 or 15 mins maybe) so don't disconnect until it's done the thing & rebooted your phone, etc.