I think Guild Wars handled the death penalty pretty well. A negative percentage to your health and energy pools, capped at 60%. It went up 15% each death IIRC, and the only way to clear it was either going back to a town or outpost, or killing mobs or bosses.
I'd like to see something similar here. A penalty to hull and shields, making you unable to survive as long. Killing mobs would reduce that penalty by a certain amount each kill. Bosses would reduce it more.