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What you are referring to is what's called a "thin client environment." The Benevolent Dictator of my LUG is a sysadmin at a hospital, where he administers just such a system using RHEL servers with, I think, 64 GB RAM. This was, in fact, the original model for networked environments, in which multiple "dumb" terminals accessed a single server.
Ubuntu has a good intro to how that works, though it references a very old Ubuntu version. The underlying concepts, though, are sound.
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