The game even had an inbuilt macro system that wasn't super sophisticated but it wasn't considered "hacking" an you could max out the easier skills that way.
So in some sense, the devs actually tried to get rid of the grind element. In any case, it definitely was not institutionalized. You could gain skill in fencing by killing monsters OR by dueling friends. There definitely was not a "kill 6 monsters and return the belts for a cool prize" style stuff. So in some sense, it was a bit like you would have liked, just not as all-out.
The thing is that the better players were people who understood how game mechanics worked, and they were older and more mentally capable than I was at 14. So they understood how to make "builds" and how to strategize, while my efforts were based on trial and error, and thus getting to a good build took the better part of a year than a month.
I would have player character "skills" be a significant but not a dominating factor. Basically, PC "skills" would be automatically learned over time and would be a way to reward players for sticking around. Instead, I would base things more on economic power and kill record. A player can gain more power economically by exploiting a large sector of space, establishing bases, designing/licensing mining/security drones, and building products for players. However, this means they would be mainly playing in the RTS/4X part of the game. The action oriented part would be based on kill record, which would be the ratio of total PC ship value you help destroy over the value of the ships you are destroyed in. Having a high kill record gains "fame" which results in direct monetary rewards and access to (expensive) special items. Something along the lines of players 1 standard deviation above the average kill ratio would randomly receive money for "sponsorships" or be given prototype items to test whenever they are in a winning battle. I would also have another metric of "reputation" which is more based on participation, but which results in lesser rewards.
Another thing I would try out would be to simply grant NPC "followers" to players with a certain level of fame who have stuck around long enough.
Which creates incentives to cause player deaths. As they say, it's all about what you incentivize.
An insurance system was added later (2005ish?) where you could pay a certain amount per item to not lose it, probably also as an attempt to make the game less harsh.
A band aid.
The problem I have with a lot of MMOs is that the power of your character is simply how much time you sink into the game. Essentially, MMOs are games that reward wasting time.
Most MMOs are structurally the same as resort casinos. There's pretty scenery and distraction which all serves to dress up the primary mechanism of addiction through variable schedule of reward.
Someone should make an MMO where your power is related to what you build, how smart you can work, and how cost effectively you fight. How about a space MMO with a procedurally generated universe of billions of worlds? Allow macro-mining and even provide players an API to write their own scripts. (All in-game resource limited, of course.) Building infrastructure (warp gates) would allow you to exploit resources more efficiently and to charge others a small toll, just like building a railroad would. Server-side execution would allow scripts to have DRM that actually works, so players could license scripts to one another for a fee. I would also have all ship designs be originated by players and licensed. A given design would "auto-nerf" through stat decay over 8 months or so, so there would be an in-game industry of creating new designs and licensing them.
PvP would be entirely be RTS-mode through drone ships purchased by a player or through a mercenary-hire mechanism which lets players participate in RTS battles in hero-class ships. (Which can either be provided by the mercenary or the employer.) Targeting would be done by the computer, with an API provided for players to write their own targeting algorithms. Tactics would depend on dodging and optimal positioning for the given weapon.