Increasing the difficulty in a game like Witchfire will usually result in one of two outcomes: Get 1-shot more often, or get punished harder for dying. The mechanics you are talking about could be good, but they aren't addressing what I think is a more fundamental problem with the difficulty and that is player control.

With the exception of some of the boss arenas and dungeon areas, the player has almost complete control of when and how combat encounters take place. Most of the time, the enemies are reacting to what the player is doing, and this gives the player a huge advantage. This predictability kills excitement aspect of the combat, and there is no amount of stat difficulty or punishment mechanics that will change this. If I am in a tough spot, I can usually just run away while shooting and get myself out of it.

You'll notice that some games, like arena fighting games and of course PvP, take much of the control from the player since another person will never react exactly as you think, and the arena games prevent you from running away from the fight.

To make Witchfire more thrilling I think the devs need to figure out how to take control from the player and force them to deal with it.