The problem I see is that you seem to have the terminal doing things like fuzzy matching input against PATH executables. But that's the shell's domain. The terminal should just expose commands for adding text items to a drop down under the cursor, and the shell should send the matches to the terminal. And capabilities like this should be clearly defined in a terminfo page (which you should definitely have, even if for non-custom capabilities it uses the same definitions as xterm), so that well-written apps can send this information if and only if those capabilities are defined.

Of course this is a huge challenge, because if you do it this way your terminal doesn't do anything new until someone writes a program to run in it using its extended capabilities. So this creates a chicken and egg problem. But you can't come up with nearly as many interesting things for your terminal to do with cursor dropdowns as everyone in the world can if you're just exposing that in the same way the character grid is exposed.