2/ Once a system interacts with another it collapses all the potential options in the system down to one
Look at a black hole that draws in material. Some of the energy is beamed back out and some falls into the hole.
but in reality there is a fundamental limit to the smallest size of a particle
No one knows that for sure. but it is known that the nature of energy can be described sometimes as a particle and other times as an energy field
The maths doesn't even maintain an accurate description of the universe at a singularity.
I think that is outdated physics you are talking about. I think the notion of a singularity has been abandoned
Basically you are saying that physics wants to observe itself. I guess in a contorted way it might be possible