If you look closely you can see the scatters are indeed blank until land then it puts the appropriate letter in based on count as you say.
As for the reels, bonanza uses multiple reel sets, as has been discussed many times and were posted on here at one point.
Obviously I didn’t have anything to do with the design of bonanza but if I had to guess my educated guess is……
There appears to be 3 sets used for the base game, (each with scatters) which is probably randomly selected each spin, with possible weighting, obvious reasons.
One set is used for max ways spins, ( no scatters, big clusters of 7 in a row etc)
Four sets used for feature ( no scatters ) either random selection or random selection based on current multiplier would be my expectation and explains the shift when you get high multiplier.
As for the cascades, I believe these originally are also drawn from the current selected set, possibly from a new random point on the strip, I say this as you can sometimes have full 7 symbols of one and still get more even tho no more than seven of same symbol appear in a row on a strip etc.
On versions that didn’t give scatters on max ways, it used the scatterless max way set for the original spin and subsequent drops, on versions that could letter on max ways, it was using a particular set or random base set for the drops.
While the game is considered very complex they can still work out expected pays by knowing the strips and average values of the reel heights, how many scatters etc.
It’s no secret that I have always loved this game and have made my own unofficial versions of it and WWTBAM the math, and methods really intrigued me, very nerdy thing to say I know but spreadsheets are fun LOL