I thought I got it right? The people trusted (Depth 2) by the people trusted (Depth 1) by the people you trust (Depth 0).
I keep my depth at 2 because I do like having a fairly large network, but I do also go through and remove those who I feel mis-use the trust system as-and-when I see them. I do wish that we had a trickle-down feature though, just so that a single rogue agent in your trust network who you've missed can't damage things too much. I'm also considering the fact that I'm willing to bet a large portion of this forum is using Depth 2 settings.
Sorry, you're right, I missed one level of "trusted" in your description. I'd suggest at most depth 1 to anyone. 2 is way too broad I think but I agree that many are using it just because it's the default. As for damage... there isn't really any immediate damage, is there? I've had it a couple of times where I see some odd ratings, figure out who's causing it, and exclude them.
That's not to say your suggestion is without merit. But probably not the highest priority and can be sorta kinda managed with depth/inclusion/exclusion settings.