Smaller in what sense? The software part of the DI only needs space when it's actually used, but the same is true for any feature that needs to be displayed on the screen. They probably could make some of that smaller if they moved it into the general status bar, but presumably they would need to move the FaceID hardware into the bezels und decrease the screen size.
I agree with you that a hole punch would take up less screen space, but what's left of the notch is needed for FaceID, so not really a software question.