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What possibilities are there to take input through an Arduino, process that input and say, overlay different video files, forward/rewind them, put effects on them, all in real time depending on input?
It's possible, but your question is rather vague. What would you like to know exactly?
I haven't tried this, but I wonder if loading all frames into PGraphics (when dealing with short video clips) would allow faster reaction times. Also, for the effects, if you want them to be very fast, shaders might be the way to go.