Would it be possible to have the parity drive instead store the series of 1 and 0 data inside a text file instead of pysically on the blocks of the hard disks which would allow for massively reduced size and no longer need the requirement of having the parity drive as large as the biggest drive in the array? It would function the same but instead read the series of 1 and 0s from a text file instead of the sector blocks on the hard drive.

No. What you are describing would require the parity drive to be larger than any single data drive by a huge margin. Text is stored as ascii codes, which require 8 bits per character. So a 1 in a text file takes up 8 bits to describe what takes up 1 bit currently. Same with a single 0. Plus, all the bytes required to maintain the file system that contains said text file.