Myself, i think some very good ideas are presented here, but as they are currently stated, they seem to be somewhat biased towards factions with like 20 players.
I like laithes concepts, but they are honestly too harsh. I do completely agree that the defense bonus be removed, but the power changes should be MUCH less. 8 or 10 power loss a death is far too harsh. If someone were to make a one person faction, and build the base with the intent of inviting more people, all it takes is one lucky arrow shot sending them flying off their wall and /f claim for the faction to be over with. I think that, if changed at all, the power loss should be increased to 5 or 6, meaning 2 quick deaths puts you at 0 power. I do think that the power regen should be lowered also, i believe .2 power per minute as laithes suggested is fine.
Cub_Nake also brought up a very good idea, with some power restored upon a kill. This should be implemented so that you drain half a persons power that they lose if you kill them, except it only works with positive power that they lose. (ex. killing Jord who has 10 power, which lowers him to 4, would give me 3 power. But, killing RodGreen, who has 0 power, and thus lowering him to -6 power, gets me nothing, as he dips into the negatives.) This would really give quite an incentive to fight back in a raid on a faction, especially if they got raped tending the farm, mining, etc. Also, laithes suggested bounties, I would think that either just my plan should be implemented, draining half power a kill, laithes' plan, with huge money bounties, or a bit of both, with draining 1/3 power and bounties limited to, say, 3k.
But, this system would obviously work best if there were a few large factions, which are more resilient to wompage power-wise. As people are right now, trust is a very rare commodity, and people often only let trusted real life friends join. Many new people (and myself) are excluded due to, "I don't know you well enough." We may want to provide an incentive for larger factions by a daily/weekly supplement of money/items based upon a factions number of members.
Feel free to make any suggestions/amendments/comments on my plan here.