After Round 512 finished, I took a look at the rating changes from Div 1 and ended up calculating their average.
To my surprise, the sum of the rating changes was -5383 (anyone want to help double check the math?). This means that for the 500 participants the average rating change was -10.77. I know this contest is probably an outlier, but this seems way too extreme to be reasonable.
If anything, I think the average rating change ought to be slightly positive, in order to reward participation over time. For example if the average rating change per contest is +0.5, then if someone participates in 100 contests over two years (which is some serious dedication), the most this could contribute to their rating is +50, which seems perfectly fine. This also serves as encouragement for relatively inactive people to be more active.
However, averaging more than a 10-point loss in a round is unreasonable and likely to discourage people over time from participating if it keeps happening; i.e., people who maintain a similar level of performance will see their rating go down over time, and people who improve slightly will see their rating stay flat. If my calculations all check out, the rating algorithm likely deserves some reconsideration.