So, I plan to do this using a cylinder cast for terrain interaction (e.g, the requirement is that the character is able to follow the terrain as you walk around, walk up stairs and stuff) and use a capsule cast for interacting with objects in the world and deciding when the character hit the terrain and must stop. so, the capsule would be slightly off the ground, and the cylinder would be between the ground and the bottom of the capsule. anything hitting the cylinder, the character would step onto, and anything hitting the capsule but not the cylinder would stop him in his tracks. then, I could adjust the dimensions of the cylinder to change the properties of how he steps up and down, how close he can get to something before stepping up/down, and other things. Is this sound in theory? I am told that an effective character controller is a "noted issue" with the Bullet 2.68 api. This does not indicate when if ever it will be fixed.

Also you need some sort of 'magnetic' system to keep the player glued to the ground. For example, moving downstairs.

A raytcast or segment intersect downwards should be enough for that.

As for your solution, I'm not so sure. That would be ok against convex parts of the world.