I'm glad you like the idea.
In what case do you show the source code? I guess that's not critical, so it could be disabled in this case, at least in the begining. Especially as there would also need to be a convention about where the source code (which might not be Java) is inside the jar. So in a first step, it should be enough to accept jar files, do nothing in the compilation phase, and then start then with 'java -jar ...'
Regarding the 50000 byte limit, I guess it should be OK, especially as one can run an optimizer on the jar to strip off dead code before submission. I agree some general purpose libraries could still be installed on the server if there is demand for them.