According to one individual with a highly questionable reputation, this concept project could work because PS1/PS2 discs are authenticated only once on the VSH though liblv2 and the PIC chip would just automate it.
However, if Sony updates liblv2.sprx and more specifically ps1rom.bin so the emulated mechacon is updated it could be patchable.
Finally, to roughly translate from the video's caption:
"This video montage shows the operation of the chip that we are developing to load copies of PS1 and PS2 (if you're retro) in the PS3.
This video shows how to work, without leaving the console open and without switches etc out.
More information on the development of moddchip www.demonhades.org."
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Well, thanks to craigslist, today I got my hands on a 60GB ps3 running 2.35 (Wow, I know right?)
Anyways, I'm not sure what I'm gonna do yet (forgot what I CAN do), but it's a bit laggy and only with this hdd in it. I have the hardware to test now, gonna leave my other ps3 sitting in the corner for a bit. I can tell