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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All PS3 models can play PS1 discgames (through a complete software-emulator), the PS1 games that are in the store do not have an emulator in them, they are just fixed (if necessary) so the games run good on the standard emulator (which ofcourse isn't really good at all compared to an 'opensource' emulator like ePSXe.
Nope, your wrong, those 60GB(EU)/80GB(US) did have partly hardware support which was later removed (later 80GB all regions). only the first batch of 60GB(US/JP) PS3's had complete PS2hardware (emotion/graphix chip) onboard, the latter only 1 chip (graphix chip) and emotion was emulated..
Now there appearently is already a full PS2 emulator (which also emulates the graphix chip) available, but Sony decided it is better to not release it so people will buy those HD-remakes (yep, sony are nothing more than bastards, a bit like Apple)..
As i seen in the video, it (should) work as the switch-mod, but use a timer after the disc insertion for stealth eject and then handle the insertion.
It is very much detectable by new fw, but if you extend this device, to work with swap-discs, then it will be more likely "future-proof".
(why? because, swaps are valid discs, the drive/fw has no right to do further checks, as it would cause issues in emulation/running, unlike the added check after you start a disc)