No matter how much fun I have at an event or roleplaying with people, the constant specter of losing weeks worth of progress to a minor misstep is destroying my enjoyment of this game. The way that acquiring XP isn't something you can really put effort into doesn't leave me with renewed fire to dive back into the game to regain what I've lost, it leaves me apathetic and wanting to simply quit after a defeat.
There are a whole number of things that make dealing with a harsh death penalty just feel unreasonable on a server like this.
1. It's way too easy to die from minuscule, unconscious mistakes. I lost a weeks worth of progress today simply because I walked 10 feet in the wrong direction leading to me getting boxed in by enemies. It's my mistake, but we're not talking about a series of grievous errors that lead to my demise, or taking on a huge risk out of greed, or anything like that. We're talking about a single misstep and having the entire game start a cascade of inescapable doom as a result. You ideally shouldn't die to such cheap mechanics in the first place, but if you do then you shouldn't lose weeks of progress over it on top of that.
2. Harsh death penalties encourage powergaming and punish anyone who doesn't optimize. You can't take it easy in a game like this, figure things out as you go along or build your character for RP more than raw power. If losing a fight is this punishing you need to just build a winner and be as cheap and cheesy as possible at all times. I know it's supposed to be about being careful and playing like your character values their life, but the only way to be cautious is to be overpowered. Spending more times at lower levels is pure punishment, especially since you're prevented from grouping with high level characters for questing, and way more of the common enemies in the game are lethal to you.
3. There is no way to make an effort to regain your XP. Monster kills usually net somewhere between 1-2 XP, and that's as long as you're below level 15. Quests usually grant you somewhere between 100-300XP, and every so often you walk away with 500XP during an event. Then you die once to a minor mistake and get destroyed for several thousand XP that took you weeks to accumulate. You can't get back on the horse. There is no horse. You can't say "Alright, I'm going to redouble my effort to earn this back" because getting the XP was never about effort in the first place. It was about time, and there is no way to turn your frustration over dying into more time.
So as far as i'm concerned there is absolutely nothing positive about the death penalty as it currently exists. It doesn't serve any useful purpose. I personally like the idea of a server where progress is relatively slow and earned through events and RP instead of grinding, but the appeal of that is totally undermined by a system that demolishes your XP when you lose a fight. You can't turn that loss around into something positive, dive right back into the game and work hard to get your XP back, or take it as an RP prompt for the night. You're progressing at a steady pace mainly set by events, server resets, and availability of suitable group members, so taking that penalty just arbitrarily delays your advancement several weeks. That means the death penalty is pure punishment. It isn't a challenge that makes you want to do better, it doesn't start any interesting RP, it's just a sweaty middle finger being rubbed on your face.
All the measures in place to make getting XP such a pain in the first place also just don't really add up to a fun experience. Being prevented from grouping up with people based on level sucks, because when you RP you will inevitably make friends with people from all kinds of level ranges, and you simply aren't allowed to adventure with them outside of events. If the upper level caps on quests were removed it wouldn't make much of a difference to the rate of people's progression anyways, since those 100XP from catching piglets every few days aren't going to catapult anyone into epic levels any quicker than the 20XP they get from just talking for a while, but at least you could help newbies out.
Alright, suggestion time:
I actually think the game needs to have a death penalty, because I don't think people should treat their characters recklessly. I don't like how ridiculously easy it is to die in this game, but OK, that's part of NWN. So I'm thinking a death penalty should exist to do one thing: End the adventure when someone dies, make people play out having been bested, and thus making them want to avoid defeat, but turning defeat into RP instead of pure punishment.
So, maybe when you die you take some kind of debuff, that debuff doesn't actually do anything, but it basically means the gods have agreed that there are no more resurrections for you in the next 20 hours or so. You can keep on going if you want, but you risk permadeath if you die again, so the smart thing to do is to go home and RP that you're nursing your wounds. Getting resurrected by a spell would give a minor version of this effect that simply means you get the full effect after the next time you get resurrected even if it was with a spell. So, with a cleric along you can get resurrected once without any consequences in that danger period essentially.
With that kind of system the death penalty would turn into an RP cue rather than just a massive punishment for what is often a minor mistake. It would mean that nobody is ever set back so far that they fail to progress, but that's not really a bad thing, since having people backslide too far that they can't progress doesn't really accomplish anything other than driving them off the server.