This is a fantastic question and something I have been thinking about for a while myself. But I do not have a solution.
Here is a simpler version of this problem.
Consider the problem of fitting an ellipse to a set of points in the plane.
Let f(x, theta) = 0 be the equation of the ellipse where theta are the parameters of the ellipse and x is a point in the plane.
Then given points y_i \in R^2, one optimization problem you may want to solve is
\min \sum_i | x_i - y_i|^2
s.t \forall i, f(x_i, \theta) = 0
What we are saying here is, find the ellipse with parameters theta, such that
the sum of distances between the points y_i and their "projections" onto the ellipse x_i are minimized.
This has the same problem that you described below, where every time you a add an observation y_i, you have to add a variable x_i to the problem and solve for it.
I believe this falls within the purview of what is known as the "Nuisance Parameter" problem, where x_i are the nuisance parameters.
While I do not have a solution for you. I can point you to some other people in the statistics community that are thinking about similar problems.
That said, what these studies are missing is the fact that the number of parameters grows with data. I have not found any good references or studies on that yet.