With a set list of potential dropped loot then the loot is effectively irrelevant at high levels since by then everyone will have the best loot.
Depends on the size of the loot data.
1)Enemies get ever increasingly hard to kill so that at some point nobody is able to progress further effectively capping levels at that point. If this is the case, why not just use a fixed level cap and design the game around that like most RPGs do?
This won't happen because the levels are generated to always present a challenge but not be impossible.
2)Enemies get easier and easier to kill as you gain levels (because they aren't getting harder as fast as you are getting more powerful) Player levels skyrocket, and you'll never catch up to the guy that started playing a week before you. There is no challenge and no reason to keep going.
This won't happen because the levels are generated to always present a challenge.
3)Enemies remain the same difficulty constantly (The game is just a matter of grinding enough) And the game is utterly boring because it is exactly the same from beginning to end the only difference is the numbers/stats being displayed. If you do balance the dungeons perfectly for the level increases then what is the point of leveling at all? You could just keep the enemies and players at level 1 with the same effect.
So explain why people play MMOs? They're basically exactly what you describe with some frosting. The main problem is the grinding isn't fun - waiting for spawns and having to fight other players for them; having to belong to a guild to get to all the content; etc.
What I'd like to see if what you might call fun grinding.