The design ends up being very similar to Blockstream's Liquid sidechain, since Tendermint consensus is not far off from Liquid's "strong federation" consensus.

Any feedback about improvements or critical flaws would be greatly appreciated. The design document is here: https://github.com/mappum/bitcoin-peg/blob/master/bitcoinPeg.md (that repo also contains a simplified implementation of this sidechain design).

Thanks for your feedback,

Matt Bell