That's actually not too bad of an idea. I'm sure it isn't flawless though. Didn't read the whole article yet. But I wonder what happens if the 1st rounder is traded away.
Edit - I guess it doesn't give your top pick priority but they actually give you a pick. Interesting.
Not sure exactly how to make it work the best, but maybe something like adding a special slot between the 1st and 2nd rounds that goes to the winner of the loser bracket. That way you're not giving them too much, but it's still enough to keep the teams interested.