Learn Spanish (Latin America): Lo veo un poco deshilachado.

You would replace un poco with the repeated adjective, saying Lo veo deshilachado deshilachado. In colloquial Spanish, this lexical reduplication emphasizes that the object is an extreme or prototypical example of being frayed. It often feels much stronger and more expressive than just saying muy deshilachado.

What is the root of the word deshilachado?

It is built around the noun hilo, which means thread. The prefix des- indicates removing or undoing, creating the verb deshilachar (to fray or unravel). The past participle deshilachado therefore describes something that has literally been un-threaded.

Does Lo veo here mean I am literally looking at it, or can it mean 'It seems to me'?

It can be both, but here it acts more like 'It looks to me' or 'I find it.' Just like in English, the verb ver (to see) is frequently used to express your personal perception or assessment of a state, rather than just the physical act of looking with your eyes.

As a quick refresher, why isn't it un poco de deshilachado?

You use un poco directly before an adjective like deshilachado (or an adverb) to mean a little bit. The phrase un poco de is strictly used before nouns, such as in un poco de hilo (a little bit of thread).