From the web we know that xslt WG is thinking now on how to make xslt more friendly to a huge documents. They will probably introduce some xslt syntax to allow implementation to be ready for a such processing.
They will probably introduce an indicator marking a specific mode for streaming. XPath in this mode will probably be restricted to a some its subset.
The funny part is that we have implemented similar feature back in 2002 in .net. It was called XPathForwardOnlyNavigator.
Implementation stored only several nodes at a time (context node and its ancestors), and read data from XmlReader perforce. Thus one could navigate to ancestor elements, to children, and to the following siblings, but never to any previous node. When one tried to reach a node that was already not available we threw an exception.
It was simple, not perfect (too restrictive) but it was pluggable in .net's xslt, and allowed to process files of any size.
That old implementation looks very attractive even now in 2010. We expect that WG with their decisions will not rule out such or similar solutions, and will not force implementers to write alternative engine for xslt streaming.
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