Newlines are handled differently depending on if indentation is required:
Unindented
foo bar baz
foo bar baz
Indented
:foo :bar : :baz
foo bar <!-- invisible extra list item --> baz
The problem here is going to be working out user intention. If the user puts in two line breaks (with a clear empty line) we can safely remove it in the indented version, but if they only enter one linebreak, it is not clear if the user intends there to be a break. Hopefully the live preview will help with this.