At best a handful of parties, and it only works in small elections. You get to bigger and bigger elections the system always reduces the choice, which means that the bigger the system is, the less effective democracy becomes.
Of course democracy was never meant to be the most efficient or effective system of government. It's simply the most compromising one.
You say "at best a handful" like there isn't a meaningful difference between "2" and "3 or 4". The US is deeply unusual in their persistent two party system. Germany probably has nearly as many voters (given higher registration and turnout rates) as the US, and certainly doesn't operate as a two party system
Of course democracy was never meant to be the most efficient or effective system of government. It's simply the most compromising one.