It tends to fail for me if I attempt to navigate to other folders (not a full crash, but it snaps back to the Choose Your Picture screen once I choose a folder via Locations), so I connect the phone to my PC and move images into Camera Roll which seems to be the only folder my phone wants to see right now. You might have to wait a few seconds for newly added images to appear in the Camera Roll.
I love the idea! Sadly, your steel-on-steel thing doesn't work because the tiles and the desktop wallpaper itself are both translucent. If you have a Dark theme set, your wallpaper will be darkened (all values moved slightly towards black), and Light does the opposite (all values moved slightly towards white). Then the tiles themselves also shift the values below them toward the theme colour. This means the tile is darker than the background in the Light theme, and lighter than the background in the Dark theme.
Here's the problem in Light: