Yeah exactly – I had an Image I updated using set_pixel(), turned it into a texture with ImageTexture.create_from_image, then plugged that texture into a Sprite2D.
The only thing that was kinda tricky was if the player held down the pencil and moved the mouse quickly, they might move multiple pixels in one frame. So there would be gaps left in the line they were drawing. I did some interpolation to fill in the missing pixels.
Thanks for playing!