Way late reply you'll probably never see, but I'm fairly sure it's possible with the U2F protocol and existing hardware. I simplified the algo so as not to obsc

Way late reply you'll probably never see, but I'm fairly sure it's possible with the U2F protocol and existing hardware. I simplified the algo so as not to obscure the big picture, but I have actually worked out all the details and identified hardware I think would work. (I seriously considered trying to build a business around the idea and worked through the feasibility in a lot of detail. In the end I decided it was completely feasible but a crapload of work and limited marketability.) You've correctly identified most of the tricky bits: the real algo involves key agreement plus symmetric crypto, it's a tight fit size-wise, and not all hardware has the necessary capabilities. However I think you're wrong about the conclusion. Can't say for sure though, as I didn't produce a working prototype. If you actually see this and want to discuss it in more detail you can find my email in my profile.