If there aren't enough bits/steps, the small changes in level are going to sound switched and abrupt, an effect we perceive as 'grain'. No matter how good of a D/A converter being used, it can't create information that isn't there.
Let's test your assertion which says that something with only 2 steps must be bad. Ok.
For instance, SACD home systems use a 1-bit playback DAC. Yes, they oversample, but in that revelation lies your failure to understand how it all works. SACD uses oversampled, noise-shaped PCM. Yes, boys and women, that's all SACD is, an inefficient form of PCM.
When you have no oversampling, it is still entirely possible to switch that 1 bit (2 level) system so that the resulting sound is pure white noise. That's what dither is supposed to do, and what it does perfectly well when it's done properly.
As to your illusion of steps, don't forget that there is a reconstruction filter in any DAC, so you don't actually see the steps in any case.
You are operating from a point of view that has been intentionally propagated by some completely irresponsible authors and bloggers, which I am not blaming you for, HOWEVER, I must advise you that you are flat-out wrong in your assertion that you MUST have granularity at low levels in PCM.
SACD is a perfect example of how that has to be wrong, since it's a 1-bit system that is oversampled, yet lacks granularity. And, yes, it's oversampled PCM with quantization noise shaping, nothing whatsoever more or less, despite all of the hype and claims about it.