Thats not drywall. Its paneling that has been painted over. It looks very nice, if a person likes painted paneling. I dont, so I would remove it, and put up drywall, and do it to match the rest of the walls.

Looks like painted paneling to me and would need to remove and replace with drywall

That is a panelling. You can mud and sand the seams flat or remove and replace. Removing and replacing will be the easiest and less messy. Either way the shelves have to come down to do it.

Nothing wrong with painted paneling. People do it all the time. I just don't like the color yours is painted. Should be lighter IMO.

Color of my family room is terrible, but also panels have different widths. Whiter would be better but even in your pictures it gives me an idea of a more classic/older syle house. I wanna modernize my house.

Thank you all. I added pics of socket so you can confirm it is paneling. 2 questions:

1) You say to remove and replace with drywall. Why not replacing with smooth panels? Which are the pros and cons? As for the price?

2) The ceiling is white, but kinda of a distressed/rough paint (not sure how is it called, see pic below). From an aesthetic standpoint, would you suggest going with smooth paint on the walls and keeping the ceiling like this, going for distressed paint on the walls to match the ceiling, or going for smooth on the wall and trying to repaint/smooth out the ceiling? I feel smooth is a bit more modern but I don't mind the distressed one, can't really notice much unless you go close.

In my area people would expect smooth- I’m in the SE where texture is usually done to cover sloppy work (I know that in much of the country texture is expected)

ask your contractor for bids.

Remove paneling and replace with Sheetrock for walls, parge a skim coat over the ceiling to smooth, if that is what you prefer. When you remove the paneling, it may give you the opportunity to wire for much needed outlets/light switches and/or wall sconces. Get a plan together and talk with a contractor for bids, it's a process. good luck

Thank you. I cant believe there is not an easy way to add some stucco or other stuff on the gaps and paint to make it smooth. Such a waste of time, money, and material to replace the panels.

You implied you like the shelving - what if you re-do 3 walls - when ready in future for another "look" remove them, and paint another color for a change?

Behind shelves of natural wood, they look fine.

I taped and mudded my panelling so you could try that a PITA unless you have done a lot of drywalling so be prepared for to not look pefect unless you have the skills'

I've never done this myself, but you can purchase a particular kind of paintable wallpaper to go over the paneling. The previous owner of my house had this professionally done and 19 years later, it still looks like sheetrock. No idea who does this, but check this out for some inspiration.

https://supernovaadventures.com/2017/02/using-paintable-wallpaper-to-cover-wood-paneling/

It may be cheaper when all is said and done, to just replace with dry wall, but who knows with prices for both labor and materials, which would be a better option. Here's some wallpaper. https://www.homedepot.com/pep/Patton-White-Paper-Pre-Pasted-Strippable-Wallpaper-Roll-Covers-55-Sq-Ft-LPP-2/308769189?g_store=&source=shoppingads&locale=en-US&&mtc=Shopping-BA-F_HDH-G-HDH-059_035_WALL_DECOR-Multi-NA-Feed-SMART-NA-NA-059_035_008_WALLPAPER_SS&cm_mmc=Shopping-BA-F_HDH-G-HDH-059_035_WALL_DECOR-Multi-NA-Feed-SMART-NA-NA-059_035_008_WALLPAPER_SS-71700000087316198-58700007429557722-92700066703294479&gclid=CjwKCAjwwsmLBhACEiwANq-tXIAT6pZAqDCo5CYMZDeL41ee-iSvzavwheR0xYLMaUdFkZYWvkEMkRoC-1gQAvD_BwE&gclsrc=aw.ds

Yup my old 1970s house had painted paneling like that. When I took some of it down, it was glued to drywall so the drywall underneath could not be reused. The right thing to do is to either embrace it or remove it and replace it with new drywall (with mudded/taped seams, etc).

It was common years ago, to use paneling as an accent wall. It is a lot more work, to fill in those grooves, and get it to look like sheetrock, than it is to tear it out, and just put up sheetrock, and get it all finished. Once you would finish the paneling, you would only have a 1/4 inch paneled walls, rather than thicker sheetrock. If you have sheetrock under paneling, at least it is a good stable wall, when finished, but, yours appear to not have sheetrock under it, so there is probably give to the wall, if it is pressed on, and the mud you put on those seams to level them, could easily just crack.

Real wood paneling that yours is probably not, was a 70's standard and considered tasteful at the time. I painted an entire antique store of it emerald green and accented with copper. Got so many compliments. Another trick that can make it look pricey is to paint it all one color in a flat and then highlight some of the panels with a satin in the same color. It may be too classic a look if you want to modernize, but it can look great too. DIYers have filled the indentations to get a solid look. If you found solid panels they'd still need some camouflage where they butt together. not likely to find something like that with a nice finish. I have used luan but you need trim strips to cover the butts.

Watch this video.

https://www.youtube.com/watch?v=tLhFAYMt52c

I have a friend who used this method and you would never know that the wall was previously panel and it is something you can do yourself.

The texture on your ceiling is fine. It is not just something added to hide imperfections, it was often done intentionally and is found in many high end older homes.

It can hide imperfections, but if you have a lazy contractor they will just spray on popcorn, not have someone hand finish the ceiling.