I commented to the YouTube poster about the block occupancy design. I think these are blinking LEDs. The only problem is that the LEDs will blink continuously if the train stops in the block.
The youtube guy says he uses "flashing" LEDs. You can get them for about 2-3x the price of regular non-flashing LEDs on eBay. Hopefully he will provide additional info but I think he does this to somewhat randomize the simulated sparks so they don't all look the same. That is, for a train going at some fixed speed each wheel will hover over an "island" for roughly the same amount of time meaning the flash will last the same. Techniques such as different-sized islands, flashing LEDs, non-constant LED supply voltage, etc.. seem like possible candidates to vary each flash. With a few more electrical parts, each LED could be made to flash just once when the wheel enters an island so there would be only one flash even if the axle stopped on the island.
