Ok, I'm having fun with this:
I have a squashfs.o that works in DSL 0.9.1, and will continue to work until DSL runs under a new kernel. It DOES NOT REQUIRE A NEW KERNEL. That's right. It's just a module, and you can plug it in just like any other module.
mksquashfs seems to work just fine with no extra libs.
I'm working on an experimental proof-of-concept design for a SquashFS DSL module. It will have all the benefits of both .dsl and .uci extensions, along with a feature stolen from .deb packages, but will not occupy much RAM at all.
Essentially, it gets mounted like a uci. Since the package for this is (and has to be) a dsl, mkwriteable is already run. Once the module is mounted, it is linked into the root filesystem, its user.tar extracted into your home dir, and /sdmrc run (the feature stolen from .deb packages - controlscripts). It also has /etc/init.d/sdm-config and /etc/rc5.d/S02sdm-config linking to that - ensuring that you can have .sdm - type modules on a liveCD.
Next on my agenda is to include scripts for dynamic loading of sdm's while on a living system, support for including the files on the myDSL menu, integration with the existing mydsl-load functionality of emelFM, and the ability to (drumroll, please) UNINSTALL!