Overall, starting more powerful and decreasing in power is a good way to make the game more difficult and more challenging as the game goes on.
However, here, you are not making the game more challenging for people that are succeeding at the game. Instead, you're making the game more challenging for people that are already losing at the game and making it more likely that they'll continue to lose, leading to a spiral of increasing challenge that they can't get out of until they rage-quit.
Challenge needs to increase for the players that are no longer challenged, to keep the game enjoyable; not the players that are losing.
Losing isn't always "I made a tactically wrong choice". Infact, more commonly, it's "I accidentally clicked the wrong button, I happened to be facing the wrong direction and didn't see the attack coming, I unawaredly walked into the wrong room and was stabbed in the back, I was coincidentally was up against more powerful and more numerous enemies..." So you're punishing players for events that are mostly out of their control.
In addition to all this, players do need to see positive progression even while the game gets more difficult. It's also nice to have tactical choices and customizations to make.
What about, for each winning player, he loses a piece of equipment of his choice. Maybe instead of getting rid of it, every piece of equipment starts at level 5, and each victory he chooses one piece to de-level one level. This provides increasing challenge for winning players, keeping the game enjoyable, and also provides tactical choices and customizations (i.e. which equipment do I want to preserve long-term?).
Players still need to see positive progression as well, even if it's non-combat related. This can include things like moving up a ranking chart - but with a large amount of players, moving from rank 10017 to only 10016 isn't enough motivation.