This is looking real good. I like the idea of leveling on failure and how that ties in to the title (oh, I just got a little murdered, nice). I'd be a bit wary of making the game in such a way that "grinding failure" becomes an optimal strategy, but you probably don't need to worry too much about that sort of balancing issue for a jam game. It's also looking good in the literal sense; the aesthetic you've got going is great.
One thing that I always think about with 2D characters that can move along the third dimension is how hitboxes will work along that dimension. It'd be nice to have some sort of cue when characters are on the same plane (or about to be).