> If you can't tell whether a given block is encrypted data or just part of an mpeg, how can you choose to store only unencrypted data?
I didn't say you could :) The point of this alternative is that it separates the stigma 1%-99% toward the upper layer, but puts the implementation 95% into the lower layer--and therefore we get a stable, un-censorable distributed storage network on the lower layer with the "abuses" of the upper layer (CP and political activism both) being an unavoidable free rider, but not something "visible" (in the sense of seeing CP sites listed in your index directory) to people only using the lower layer.
This situation, of course, also describes the Internet as it is today: protocols like HTTP and SMTP are used by everyone, and also by some unethical people who send their stuff over those same protocols in encrypted containers using anonymizing proxies.
The difference here is that the two big hurdles--of identity-diffusion over time after initial data seeding, and of guaranteeing data persistence as long as there continue to be consumers of the data becoming persistent-caching peers--are taken care of by the lower layer, allowing the upper layer to just handle transparent encryption in whichever way it sees fit.
(And thus can we also replace the upper layer if we come up with a better way to anonymously and securely get the right metadata into the right hands, without having to throw out the network effect of all the extant peers. They simply start transmitting-and-caching blocks representing the new kind of metadata exchanges along-side the blocks representing the old kind.)