Reward with no risk? No thanks. I like the general idea, but nothing should be provided. Also are you thinking queue for different style matches like 1v1, 2v2 etc.? It'd be cool to be able to queue for different pre determined tiers or something.
The items could be purchased or certain materials could be traded for gear. I'm not trying to eliminate risk, I just used a sloppy description I guess. Contestants should indeed pay to play.
The thing I'm after is a structured arena with matches and predictability. Think Bernajos prize fights w/out all the dodging.
Spectator mode could make it accessible to non-combatants as currently draw in animations are severely limited.
Chests and prizes don't really work because the vast majority assume they won't make it out alive. It could be a stack of Ogh, the average player doesn't have a chance so won't attempt it, let alone risk losing their gear going.
I think of this as something that would happen weekly, or bi-weekly, and be competitive.