You dont 'need' DDS downloads to put a sponsor into the game on a per-server basis, you can deliver a sponsor via text with insim. Right from the beginning X-System had sponsor support, visible in the bottom left when you where in spectate mode, and it wouldnt take much to have added one for a few seconds whilst waiting for the results at the end of the race.
Whilst a text based advert isnt perfect, it would have been a start, and very viable to do.
However whilst advertising and co-branding is a partial solution, I dont think it would ever be viable to go far enough for a project like CTRA. Whilst CTRA could justify and prove tens of thousands of people would see an advert over the course of a year, and it's integrity at the time could provenance it as a good co-branding partner, the fact is far too many games are played each day and the marketplace for selling advertisements in games is over saturated with opportunities, short of actual customers, and there is no evidence to suggest it would increase sales for most types of goods.
Advertising in the CTRA model would have needed to be viewed more as a cream on the cake concept, the fact is the concept of the system itself wasn't born to be a financial and revenue generation project, it was born out of love, and love doesnt give you money it drains it away as anyone who's ever got near it will testify.
If you want to make money out of LFS you would need to present it to people outside of the LFS community and into the masses. There are a couple of ways to do this, either by a sim race centre - in which case LFS' lack of real cars & tracks works against it (ie: this isnt LFS' strength), a broadcast where the teams are sold to sponsors (aka Automolisimo Virtual who sucessfully do this in Mexico), or some other mass market presentation.
You'll never make money from within the LFS customer base itself, the customer base just isnt primed for it.