Sorry I haven’t read your last post yet, but I need to point out a concern I have.
I've realised there is a conflict between the 'automatic / assisted conflict resolution' proposal and the 'encrypted notes' proposal. Using the suggestion of replacing the note body with combined content using git style conflict markers, if you do that then where it is an encrypted note, it's going to prevent the content from being able to be decrypted and it's not legible to resolve the conflict either. On the other hand, if you do automatic conflict resolution based on no changes to the same line, it's also going to corrupt an encrypted note because that logic for safe merging of changes does not apply.
I think aside from encrypted notes project, there's nothing stopping a user from encrypting note content with any external tool of their choosing, so automatic conflict resolution based on no changes to the same line could corrupt content in those notes regardless. Maybe we need to drop fully automated conflict resolution and always provide the option to accept the change?