From a player perspective, 5 difficulties is simple to use and communicate, but I suspect it will perpetually require a boatload of time investment to still produce a contentious result.
Instead of having players choose one of 5 difficulties that you must perpetually balance across different party sizes and a bajillion loadout combinations, why not make it more granular? Behind the scenes the difficulty scaling is going to have 2 parts:
- Numbers that go up
- New mechanics
If you make a slider for the "numbers go up" part, you can let the players hone in on what works for them. The numeric "difficulty" is just a color code, and will be treated like a recommended way to think of it. You will have to balance the relationship between the one number and the many it ultimately affects, but if your big concern is "Is this enemy too much stronger than the rest?" then your balance team will be in a much better place. Particularly for early access, I'd recommend making the numbers go well past "literally impossible" to both leave room for future upgrades and let your players limit test.
For the new mechanics part, you *could *make those individual player options if you wanted - checkboxes that enable/disable the mechanic (or group of mechanics), but that sounds cumbersome. While you could still try to balance when those mechanics show up tied to the color code of the numbers-slider, I think that puts us in the same boat as when we started. Instead, I think you should divorce the new mechanics from the numbers. Package the new mechanics together into difficulty groups, similar to how they get introduced at different difficulty levels today, and let the players pick which level they want independent of the numbers.
This would result in new combinations like really easy enemies with all the mechanics, and numerically difficult enemies with minimal mechanics.
Reward scaling becomes more complicated, but there's only 2 inputs.