Observer as a Finite Distinction Register: Measurement Capacity, Dynamic Bottlenecks, and Budget-Crossing Signatures

A physical observer is often treated as an idealized point of access to facts. FDS-O1 replaces this abstraction with an operational definition: an observer is a finite distinction-register, namely a physical system that can register, preserve, update, order, and communicate distinctions only through finite records, finite channels, finite update rates, finite buffers, and finite thermodynamic budgets. Building on finite-observer distinguishability budgets, this paper formulates physical measurement as stable record formation under finite capacity. A measurement event is not merely an interaction; it is the stabilization of an accessible record whose distinction class can be retained and used by a finite observer within a specified time window. We define measurement capacity through dynamically coupled bottlenecks: sensor resolution, readout channel, internal memory, record stability, buffering, externalized access, compression, and irreversible update throughput. We compare this accessible capacity with task-relevant rate-distortion demand. If demand exceeds capacity, full-fidelity measurement is operationally impossible: the observer must coarse-grain, merge states, increase latency, buffer, externalize records, reset memory, dissipate housekeeping heat through irreversible updates, relax the task, or fail. This version extends the minimal O1 model by adding dynamic resource allocation, transient versus sustained crossing, reversible-versus-irreversible heat accounting, a twodimensional sensor-array simulation, an operational interface with decoherence, and a comparison with active inference. The paper does not derive quantum measurement, collapse, the Born rule, decoherence, the Bekenstein bound, holography, or the Einstein equations. Its contribution is narrower: it converts finite-observer distinguishability budgets into a concrete measurement-diagnostics framework with explicit budget-crossing signatures.