I agree the outcome should be different if you commit genocide, but you should still be able to beat the game, unlike with Morrowind. Either way, where you fail if you kill a main character, or if there's always a road forward because everyone keeps journals in their pocket, it can feel a bit contrived and immersion breaking, but I'd prefer the latter.
I think we can have both the stick and carrot for death. Sure, punishments can be annoying, and it's a hard balance between trivial drawbacks and punishments worthy of reloading, but I'd rather there be even a minimal, tangible drawback to death than nothing. But rewarding people for never dying is also a good idea. So 3-4 deaths in a game wouldn't punish you much, but you wouldn't get any sort of reward, but dying over and over again or never dying would have more drastic effects on your character, perhaps mostly in an intangible way.
Who cares if some people die a lot, though? If there are incentives for not dying that would be enough deterrent for people not to want to die. Arbitrarily punishing people for death smacks right into old-school MMO territory (Everquest) where the point was for you to play as much as possible. In a finite game like D:OS/2 (i.e. non-respawning mobs for example) that isn't such a good idea. Your argument is that it somehow cheapens death, but death in games IS cheap in general. The reload button exists so death is trivial. The question shouldn't be "How do we punish the players?", but "How do we make this more fun, challenging and rewarding for all tiers of players?".
