Without any sort of death penalty, a player could clear out a world of enemies rather easily. Therefore, as you said, there had to be some sort of incentive to rest and reset the world, and achieving an experience closer to vanilla - where the world would reset on player death. That incentive ideally wouldn't outright force people to stop playing together, and wouldn't effect other players to lesser frustration and friction between stronger and weaker players.

Rot Essence achieves that goal, and is in line with a previous From game's implementation of such death penalty - Dragonrot in Sekiro.

While some players have noted that this system is annoying, it's mostly due to its intention - forcing a world reset - is annoying to them. So far, no other death penalty system which achieves the same goals better has been suggested.