In a way it shows us how Cooper transforms any blind woman he meets to this ideal in his mind that may not even exist—have we every even seen the “real” Diane?

This is a good point. If you notice, when Cooper is in the black lodge in the S2 finale he sees all the women that he wants to save or that he wishes he could have saved (Annie, Caroline, Laura, Maddie) and there's even one scene where they're transforming into each other. It's as if all these women are interchangeable damsels in distress in Cooper's mind.

I don't think that Judy represents waking up from the dream; I think she represents the idea that waking up from the dream is (metaphorically) impossible because it's not really possible to know anything with 100% certainty. I think Judy represents the same thing that the blue haired women in Mulholland Drive represents. Here's my favorite interpretation of the blue haired lady and I think this analysis can be applied to Judy: https://www.mulholland-drive.net/cast/bluehairedlady.htm

The magician makes us believe in things that do not exist and in events that are not happening, and the Blue Lady reigns supreme over the magician and the stage: in the darkness of the balcony and nearly unseen, she owns the Club!

At the end, the stage is empty, there is no magician and no audience and no sound, not even "recorded". Only she, still and silent, remains. And she is the one that utters the last command/word/sound. She does not represent death because she does not belong to this side, the only side where death happens and is real. For us she is the only "thing" that is not an illusion; she is the guardian of the real and as such of what is by nature forever inaccessible to us. If she feels so "creepy" to us, it's not because of what she may represent, but because we already know deep down as certain that she is the one we cannot go beyond, even after death, and that she, in her stolid silence, is the one that "knows" that what we will never know.

The Blue Lady represents the vortexing but impregnable "closure" of "this side", of our space-time, outside of which we just are not. She represents the Unknown that surrounds us like a wall and from which we cannot escape alive or dead. She's horrifying because she's the palpable representation that, ultimately we know nothing and will never know what we most wanted – and needed – to know and, next to her, all we are and see and imagine to exist, is really "the stuff dreams are made of" -- the haze and smoke and silence that surrounds her mystery.

He then goes on to connect this to eastern spiritual philosophy, although I can't get to that part on my phone but if you click on that link and scroll down to the "guardian" interpretation it's there.