Right now, with a Blue 2-1 dimmer switch, I can hold the buttons to change the light brightness with high levels of granularity. Anywhere from 0 to 100%.
Is there a way I can change the switch, so that it only operates at six different levels? 0, 20, 40, 60, 80 and 100%? So holding the buttons to change will jump between those levels and nothing in between?
Local protection turned on prevents the switch from physically controlling the wired load. So with local protection enabled, presses of the paddle will not have any effect on the wired bulbs.
The reason you turned local protection on for the automation that you designed is because you do not want the paddle presses to allow the switch to physically control the load. You want the switch to only send the paddle press information to the hub which in turn sends directions back to the switch.
So yes, with local protection on and a reliance of the automations to control the load, you are dogmeat if the hub goes down.
The automation should still work fine, as you noted. The only difference with protection on or off is that with it off, press and hold will still dim the light up and down. I guess it depends upon if you just want to be locked into the levels defined in your automation, or if levels set via press and hold in between those automation defined levels are ok.