And I believe the bulbs around the outer edge were closer to the neg than the inner ones -- supposively to "burn in" the edges of the image. But it has been perhaps 20 years since I was in AA's Carmel darkroom.
At least with LF landscape, a bad day of photography can still be a good day of exercise.
Quantisation in the dodging/burning is not the same as quantisation of the whole image and will not result in loss of continuity of tone. Consider a typical burn I might do: 8s base exposure and then 4s additional exposure on one part of the image - these levels can be represented with only two bits and are therefore extremely heavily quantised. But of course, the original image is being applied during that time, so it doesn't mean we're quantising the image to two bits. There would be an issue if the dodge/burn tool was focused in the print but as long as the edge is sufficiently defocused, there won't be a hard line of changing tone.
Same principle applies to dodging or burning using a digitally printed mask and/or LCD. You could do it with only 3 or 4 different densities and the effect would be quite as good as any dodging or burning someone does by hand as long as the pixels in the mask are not focused in the print.
I'm not sure how putting an LCD under the enlarging lens will affect sharpness - could be terrible or it might have no effect at all, depending on what the surface finish is. Putting it a few mm above the negative should be fine under any circumstance though. I had a bit of a look on mouser and there are suitably sized (for MF) TFTs available with controller for about $120. It would require you be an EE to interface it with a PC though, which is where the larger VGA modules that plug straight into a computer would be much much easier.
Using an LED array above a negative could work I guess, but I think it would be very difficult to get uniform illumination due to the way the light beams from the LEDs overlap. And you'll get way more resolution from an LCD anyway.