Some YouTube clients allow "local extraction" (FreeTube and LibreTube, to name a couple), which sidesteps the need for an instance altogether. However, that then means either 1. You use a VPN to hide your IP from YouTube and risk getting the VPN server IP banned or 2. You don't use a VPN, expose your IP to YouTube, and have a (small) chance of banning your own IP.

The best alternative would be to remove YouTube altogether and switch to something like PeerTube or Odysee, but you can't expect all your favorite creators to be there.

I think this is absolutely doable to problem is you need to have enough users on all the time to make this sort of thing work soa doptionn is important. You could probably piggy back off existing open source projects to get it going.

Do I understand correctly, what you mean is that there is an Invidious instance to which two users are connected. User A sends request to Invidious to get a video, Invidious forwards it to user B, user B downloads the video and sends it back to user A?

Sounds a lot like Tor or maybe I am missing something?

So, kinda like a cross between FreeTube and Torrent? Interesting idea...

GrayJay works fine for me

Bad actors might only feed on such a networks without seeding, so you will need some kind of good actor reward in your proposed system.

I've been running Piped for over a year. Its been fine, though I have had some bobbles like it had a buggy Newpipe update that took it down for a day.

I run it on docker and set up watchtower labels so its kept right up to date since I think YT keeps messing with Newpipes access.

this sounds like decentralized anon network to me, like i2p... but with access to the clearnet. https://geti2p.net/en/