As you've already noted the TKey's KDF is Hash(UDS, Hash(TKey device app), USS), which means every device+application combination gets its own unique key material. As you conclude this means an update to the loaded application changes the key material, which changes any public key the application might derive. This is a hassle and not very user friendly.
However, nothing prevents the loaded application (A1) to load another application (A2) in turn. This is a key feature, as it allows A1 to define a verified boot policy of your choice. The immutable firmware would do the KDF using A1's machine code. A1 running accepts a public key, a digital signature and A2 as arguments. A1 measures the public key as context, verifies the digital signature, and then hands off its own contextualized key material to A2. In this example A1 is doing verified boot using some policy, and A2 is the application the end user uses for authentication: FIDO2, TOTP, GPG, etc.
Regarding key compromise of the developer's key you might want to look into transparency logs. Another project I'm a codesigner or is Sigsum - a transparency log with distributes trust assumptions. We recently toggled it v1, and it should be small enough to fit into a TKey application. We haven't done it yet though. Too many other things to do. :)
Very cool! That's a nice design that gives the developer the choice on the trade-off between being upgradeable and being future-proof against developer key compromise.
Transparency logs indeed are a neat ingredient to use here. I've heard of other software distributors (e.g., Firefox) using binary transparency logs but hadn't heard of anyone use them in the context of HSMs/security tokens/cryptocurrency wallets yet.
Thank you! We think so too. It is inspired by TCG DICE, which came out of Microsoft Research if I recall correctly. This approach has several other benefits as well (ownership transfer etc) which I've outlined in another comment in this thread.
Here's a cool application we've yet to make: Instead of only using the transparency log verification for the verified boot stage, use it in the signing stage as well - imagine a USB authenticator that only signs your software release if the hash to be signed is already discoverable in a transparency log. You could also rely on cosigning witnesses for secure time with distributed trust assumptions, and create policies like "only sign stuff if the current time is Monday-Friday between 09-17". That would require a challenge-response with the log though.
Regarding binary transparency I think Mozilla only considered doing it, but never actually did it. In part this was probably because CAs and CT log operators didn't want CT to be used for BT as well. Speaking of transparency, you might be interested in another project I'm involved with - System Transparency - which aims to make the reachable state space of a remote running system discoverable.
As you've already noted the TKey's KDF is Hash(UDS, Hash(TKey device app), USS), which means every device+application combination gets its own unique key material. As you conclude this means an update to the loaded application changes the key material, which changes any public key the application might derive. This is a hassle and not very user friendly.
However, nothing prevents the loaded application (A1) to load another application (A2) in turn. This is a key feature, as it allows A1 to define a verified boot policy of your choice. The immutable firmware would do the KDF using A1's machine code. A1 running accepts a public key, a digital signature and A2 as arguments. A1 measures the public key as context, verifies the digital signature, and then hands off its own contextualized key material to A2. In this example A1 is doing verified boot using some policy, and A2 is the application the end user uses for authentication: FIDO2, TOTP, GPG, etc.
Regarding key compromise of the developer's key you might want to look into transparency logs. Another project I'm a codesigner or is Sigsum - a transparency log with distributes trust assumptions. We recently toggled it v1, and it should be small enough to fit into a TKey application. We haven't done it yet though. Too many other things to do. :)