... it just seems that kids demonstating abilities versus physical competition (which has its drawbacks as well as benefits) is a good alternative. And, if we had levels (such as belt advancements) to show mastery of new skills.

For the past several years in my clinics I have presented the fact that 70% of kids are done with competitive sports by the time they reach the age of 13. The number 1 reason for this, is the lack of fun. The 2nd, is too much pressure from adults.