I really like the direction for the system presented in the post. Here's my feedback:
- add a small icon to the player's nameplate (maybe next to where the alliance war rank currently is) to indicate the player's difficulty, it's important information to consider for other players nearby, and it will also be a nice way for veterans to show off;
- consider extending Vestige to include additional "global" combat mechanics, for example when in combat in Vestige, there's a chance for an orb to spawn near the player which does some AoE to avoid, this will help to make base game fights which don't have any mechanics (apart from auto attacks) more fun. This could also be done by adding an additional tier beyond Vestige to differentiate them;
- extend the system to instanced content (dungeons, trials, arenas), a lot of dungeons (especially the base game non-DLC ones) are really easy nowadays, even on veteran, so for me (and other experienced players I imagine) playing base game dungeons is simply no longer fun. This could be done by adding 3 new difficulties on top of the current Veteran: Veteran (Seasoned), Veteran (Master), Veteran (Vestige). In the future I'd really love to see this extended to allow for unlimited difficulty scaling (e.g. Veteran (Vestige+5)) along with competitive ladders;
- consider adding official iron man (no trading allowed) and permadeath toggles when creating new characters, I think this would really fit nicely with the Challenge Difficulty system and would further incentivise players to start new characters and replay older content;
- introduce new achievements tied to this system, this plus the additional exp and gold should provide enough reason to engage with the system I think.