Here's what I would do if I was running Microsoft:
1. Disc based games work just like disc based games have always worked. You can use them, borrow them, trade them, sell them, rent them. You can't play the games without having the disc in however.
2. Digital games work the way Microsoft proposed they work. To play them, you have to go online once every 24 hours. (Maybe 48 isn't unreasonable to publishers either). However, you obviously don't have to change discs, you can allow one friend out of you 10-friend "family" to check a game out of your library and play it when you're not. You can also access your library from any console you sign in to.