I think it’s pretty clever and a fun proof of concept. Probably falls into that camp where it’s impractical in any scenario I could think of, mostly because there would be a heck of a lot of scrolling and copying and pasting to update any graphics, and browser memory usage would probably be pretty high.
Although… (and maybe you had this in mind the entire time), you could do it all server side on the fly.
<?php div_pixelize("image.jpg"); ?>
Or maybe even somehow parse PHP before it goes out looking for all <img> elements and replacing them with this function.