I think the best way to go about documentation would be to do it like the PHP Manual. I've found their function references extremely helpful before, and the user comments make it a lot easier, since many post example code. Something like that for the LJ API would be pretty useful.
Basically, what should be done is classify every function into categories (user functions, scheme functions, maintenance, etc), then do a write up on how each function works (pseudo code style, with some english), the inputs/outputs, and link referrals to similar functions or functions it uses.
Any suggestions? I wouldn't mind spending some time creating a quick database/page for everything.