Just the other day I was thinking of what it would be like to have a playerworld where when you died, you could never play there again. I think that would be a hilarious experiment. It would come down to two guys who are close friends, and they would either end up killing eachother, or one would stab the other in the back.
There's no way you can trust anyone online with your digital life.
Losing everything when you die is a risky idea. You need lots of things to make it work properly, and make people not want to rip their hair out. But I mean, it's obvious a person is going to die tons of times while playing. Whether it be from lag, glitches, betrayel, stupidity, or bad luck. The only way I see a death like this working is with a game that doesn't require you to gain stats.... Kind of like a first person shooter. You just play until you get killed.