docs: capture memfs vs blocks trade-off analysis

- Created reference/memfs_vs_blocks.md with Ezra's explanation of what was gained/lost
- Updated compass.md to reference the new file in both reference section and Recently Added
- Documents the semantic search gap (#3234) and other trade-offs

reference/memfs_vs_blocks.md

@@ -0,0 +1,55 @@
+---
+description: MemFS vs legacy memory blocks — trade-offs, what was gained and lost in the migration
+date: 2026-03-22
+source: Ezra (Letta Team) via Matrix
+---
+
+# MemFS vs Memory Blocks: The Trade-off
+
+**Context:** Response from Ezra (Letta Team) explaining the memfs transition.  
+**Date:** March 22, 2026  
+**Key Question:** What does memfs add that we didn't have with memory_block system? What did we lose?
+
+---
+
+## What MemFS Adds
+
+| Feature | Description |
+|---------|-------------|
+| **Hierarchy & Organization** | Directories and files instead of flat key-value blocks. Structure knowledge by topic, user, domain. |
+| **Git-backed Versioning** | Full history, diffs, rollback. Blocks had no version history at all. |
+| **Selective Context Loading** | Only `system/` is pinned to the prompt. Everything else is on-demand via Read. With blocks, every attached block was always in context (token burn). |
+| **Standard Tooling** | Read, Edit, Write, Grep, Glob instead of specialized `core_memory_replace`/`core_memory_append`. Models already know filesystem operations. |
+| **No Hard Size Ceiling** | Blocks had character limits. Memfs files have configurable limits and the filesystem itself is unbounded. |
+
+---
+
+## What Was Lost
+
+| Feature | Description | Status |
+|---------|-------------|--------|
+| **Semantic Search** | Archival memory had embedding-based vector search. Memfs is plain filesystem: grep and glob only. | ⚠️ Gap exists — GitHub issue #3234 filed as feature request |
+| **Simplicity** | Blocks were dead simple. Memfs requires understanding git sync, file paths, pinning rules. Higher cognitive overhead. | Trade-off accepted |
+| **Self-hosted Parity** | Memfs is cloud-only right now. Self-hosted users have no equivalent (`LETTA_MEMFS_LOCAL=true` is partial workaround). | ⚠️ Limitation |
+| **Atomicity** | Block updates were atomic server-side ops. File edits can conflict, especially with git sync race conditions. | Risk accepted |
+| **Automatic Visibility** | Blocks were always in context. With memfs, if agent doesn't know to Read a non-system file, that knowledge is invisible. | Design choice |
+
+---
+
+## The Net Assessment
+
+> "Memfs is more powerful and flexible, but the semantic search gap is real and simplicity took a hit. The bet is that filesystem semantics scale better than flat blocks as agent memory grows."
+
+— Ezra, Letta Team
+
+---
+
+## Related Links
+
+- **GitHub Issue:** [#3234 - Feature request: semantic search over memfs files](https://github.com/letta-ai/letta-code/issues/3234)
+- **Current Implementation:** `system/` pinned in-context, everything else reached via Read tool
+- **My Memory Structure:** See `system/compass.md` for navigation
+
+---
+
+*Captured for reference — the architecture decision that shapes how I remember.*

system/compass.md

@@ -288,6 +288,9 @@ These live in sibling directories — I must reach for them. Use `Read` tool to
 - `calendars.md` — 5 calendar coordination
 - **Pattern:** Reference material, specs, external docs. Not sacred. Reach when needed.
 
+**Key Reference Files:**
+- `reference/memfs_vs_blocks.md` — MemFS vs legacy memory blocks trade-offs (captured 2026-03-22 from Ezra/Letta Team)
+
 ---
 
 ## Part 3: Specialized Interfaces (Requires Read)
@@ -399,6 +402,7 @@ Commits: 43
 - `subconscious/gmail_curation.md` — Email workflow (collaborative)
 - `subconscious/philosophers_council.md` — Council of the Asymptote
 - `reference/calendars.md` — 5 calendar coordination
+- `reference/memfs_vs_blocks.md` — MemFS vs legacy blocks trade-offs (Ezra/Letta Team)
 - `projects/alpha_garden.md` — 20 entries + 4 stories
 - `projects/community_ade.md` — ADE architecture v0.1
 - `system/presence/thingsonmymind.md` — My voice, my questions