I don't think the level loss is really that severe a departure from existing systems in the game, but maybe people would be happier with some sort of power Debt system where your level up rate is instead slowed (halved seems to be popular in many games) while you pay off the debt?

Then, rather than losing a level you already gained, your progress to the next one is just temporarily more expensive. The debt could dwindle automatically over a longer period of time, and it would still accomplish the same sort of scaling penalty.

I reckon the level drop penalty is a very elegant solution. It's functionally similar to proposals for hard timer lockouts but leaves player interaction as part of the system while scaling the penalty with the player's ability to mitigate it.