i personally think this system sounds really fun.
even if i get my uber super cool weapon, ill some day be able to convert it to some above average (im probably being too optimistic) materia and equip it to my newer more uberer weapon. id just keep it as my main weapon till that time comes, and if i can have two, then hell ill convert one and keep the other.
as far as people showing up to parties gimped and stuff, well i can see that happening however i think some parties might form more designed for that and parties for actual leveling/gear. the reason why is because there will always be people who like the highest numbers they can pump out and doing so would require optimal gear, not grade B gear.
so basically i can imagine that it wont be this big chaotic mess of players ONLY swinging crap weapons around, in time players may actually work this very easy to understand system.