How does the current Bitcoin software deal with sequence numbers that are not 0xffffffff? Is every value for the sequence number accepted? If a miner receives double-spends with different sequence numbers (all with zero confirmations), will it choose the one with the highest sequence number for inclusion in a block?
It seems that the "microtransaction channel" implementation in bitcoinj always uses sequence number 0 for to-be-updated transactions. Is this the recommended way of setting the sequence number?
Transactions don't get replaced in the client based on sequence number
any more. More recently, the handling of nLockTime was also changed, so that transactions with an nLockTime in the future can't enter the memory pool. There's some history at
the wiki.
I posted an idea for payment channels to the bitcoin-development list yesterday, provoking a
discussion of this very topic.