So, there's this thing called Divine Command Theory.
It states that morality comes from a divine source, basically whatever that divine source says is moral is. As the wikipedia article says, there is a lot wrong with the Divine Command Theory.
There's also a thing called the Rock 'n' Roll Command Theory. No, really. It states that there are no independently existing badass things. Rather, whatever the source of Badassness does is badass. And the source is (obviously) Iggy Pop.
So no, he hasn't sold out by appearing in Lego Rock Band. Hell, it isn't even an unlikely match. Exposing yourself, self mutilation on stage, not wearing shirts, and pioneering new music genres are not more hardcore than Legos or Rock Band. We only view those things as hardcore because of the wonderful Mr. Pop. Had he started out his career reading Little Women to orphaned kittens that is what would be the source of much pearl clutching and censorship and grounding in the modern day.
But what about all the badass things before he was born, you say? Well, I firmly believe that right now Iggy Pop is going out in his Lego time machine teaching the pre-1947 world how to be badass. (Also, interestingly enough, based on his activities shortly after being born it was cool to look at boobs, and puke all over yourself. The more things change, the more they stay the same, eh?)
And of course, we've already been told how to be badass in the present. Buy Lego Rock Band and play the crap out of it.