I think you have explained how it works technically very well.
However in order for steem to work, we must make it into something that is useful for many people.
The current structure is problematic because it centralizes the rewards to very few at the top. What is required for a successful reward system is a more evenly distributed payout algo. Cutting off the highest paid post with exponential rewards does not really help because it will simply give the rewards to the 2nd highest post, where you would have to re-do the same procedure.
We could simply just pay rewards according to how many votes weighted by SP authors receive and many more people would be paid and be happy. This would create greater retention and attract more users.
Downvoting the way you described as a tool for re-distributing funds looks to me like a workaround that does not work (i.e. like @smooth described).