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gwern comments on Open Thread: July 2010 - Less Wrong
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Already done; see Dasher and especially its Google Tech Talk.
It doesn't reach the 0.7-1 bit per character limit, of course, but then, according to the Hutter challenge no compression program (online or offline) has.
Wow, and Dasher was invented by David MacKay, author of the famous free textbook on information theory!
According to Google Books, the textbook mentions Dasher, too.