If you all will forgive me, I'd like to give a short story about my initial experiences with DoomRL.
I don't remember a lot of the details, but when I first started playing, I was awful. On HNTR I couldn't get more than a couple of levels in. ITYTD was the only mode where I could be remotely competent. Looking back, it seems I got my first win (on ITYTD) on May 1, 2010. I guess I took a large break from playing, because in March 2011 I posted a YASD also on ITYTD difficulty with only a few more deaths on my profile. What's important to realize at this point is that I had AoMr and AoB already unlocked, but I still struggled to win on ITYTD. I had meddled with AoMr a bit even before I had any victories, but without being able to win not much came out of it.
In September 2011 I joined here and started working for my first HNTR win, which I achieved in October. At this point I also had AoSh unlocked for a while I think, and after you, thelaptop, suggested trying for a challenge win, I went on to win AoSh. Then I did a melee run on ITYTD, which was training for my future AoB attempts, and it was also the point when I discovered the power of melee firsthand. What followed was wins in AoH and AoMr and AoB, and this was pretty much the point where I discovered that challenge modes were kind of fun, and shortly afterwards I worked to get all the bronze medals.
It's not a very interesting story, but the important points relate to challenge modes and the ITYTD difficulty. ITYTD was the only reason I kept playing DoomRL, so I have a lot of love for the difficulty despite not playing on it anymore. And before I was even good enough to get HNTR wins, I had some challenges unlocked that I might have played more back then if they were available on ITYTD. To drive the point home: the reward for dying past level 10 on ITYTD is challenge modes that are only available on HNTR and above.
All your points against ITYTD except the total lack of rewards apply just as well for the standard game. But I didn't play on ITYTD for the rewards, I just played to get a win. I wouldn't be posting here today if ITYTD didn't give me a good reason to keep playing DoomRL. It was a huge achievement for me just to win, and it was an even bigger achievement when I finally won on HNTR. That period of time was a relatively large fraction of my history; because challenges weren't available on ITYTD, I very, very rarely played any challenges before then.
This post wasn't as short as I expected it to be. I believe new players need ITYTD as a stepping stone, and I don't think we should deny them the ability to use it as a stepping stone for challenges. If they didn't have ITYTD in the standard game they would probably give up; I know I would have. (I'm repeating myself a lot now, but I think it's a very important point, so I'll repeat it again. Without that "watered down difficulty" I wouldn't be a DoomRL player and supporter today.) For the same reason, I avoided challenges when I was a new player because of their difficulty restriction and I imagine I wasn't the only one. DoomRL is still the only roguelike I've ever recorded a win in, and now I've even won on HMP. I do believe that winning on ITYTD serves as better training that dying over and over on HNTR, and it's also a lot more motivating.