It turns out the first run of Proto 0-8-0s are known to have a shorting problem in the engine headlight board which results in this when switching to DCC. One of the guys on Trainboard has seen this many times. Waiting to hear if I can fix it myself.
The rapidly flashing headlight indicates a short circuit in the wiring. The problem may be in the locomotive itself and not the decoder or your installation. The only way to know for sure would be to try a different brand of decoder that has the wiring harness already installed. If the headlight still flashes, the problem is in the locomotive wiring; if not, the problem is in your soldering.
With small gauge stranded decoder wire it's very easy to have a stray strand touching an adjacent pin and not be noticeable except under very strong light and a powerful magnifying glass, or a solder bridge between two contacts, so try performing a very thorough examination of your work, looking for these problems.
There are some alternative decoders available that have the pins integrated onto their board, such as the NCE N14IP, that would require no soldering.
http://www.ncedcc.com/images/stories/manuals/n14ipv35.pdf
I wired a Sliver Mini to a NMRA 8-pin plug for installation in my Proto N scale 0-8-0. I checked the wiring order very carefully and it is correct. I plugged in the decoder. Upon placing it on the track the tender headlight begain flashing repeatedly once per second. I could read the decoder ID and version on my Power Cab, and could also read the short address and program a long address. The problem is the engine does not move when applying throttle power. Tender headlight keeps flashing once per second in both Ops mode and Program mode. I checked CV 30 (Fault Display) and it reads 4. If I read the Lenz manual correctly that means Motor / Track Short Circuit. I cut power but left the engine on the track. I checked continuity again and identified a short between pins 1 and 8 (Ve+ and Track power), both on and off the tracks. But there is no equivalent short between Ve- and Track power. When I unplug the engine from the tender and check again there is no short between Ve+ and Track power.
I checked the shrink sleeving at the engine connector and it looks okay.
I've since pulled the DCC plug and reinstalled the DC shorting plug and the engine is running around the track just fine on DC. Anyone have any clues?