I have never seen the source of knytt online, just the source of knytt stories online, which is frankly a whole new engine, and the multiplayer must have been made from scratch. The progress in this source was much less than in the video. It connects, but that's all. A black square represents the other player, no chat, no "move to next screen".
Yes, it would be possible to set up knytt with multiplayer, without chat. And that's what I've been doing the last 3 months, though not with knytt but with the latest official knytt stories build from Nifflas. Players are moving around, but somehow I screwed up the engine cleaning loop, and I have no idea why.
To a further notice, I have set up an SVN server with the knytt stories online project set up there.
If anyone is interested, and you have Multimedia Fusion and a little knowledge with subversioning, feel free to PM me and I'll send you the SVN details.