...So ... with increasing network hashrate, the difficulty goes up, and the payout goes up as well? Sounds like these two variables will cancel each other out. Why not just have a constant difficulty with no variables?
You are missing the point, the more hashing power thrown at this coin, the more total coins will be available. Also it puts everyone on equal ground. If i have 1mh i get x, the guy with 5 mh will get 5x, x never changes. If someone comes in with 40mh they get 40x and I still get 1x. Rather then a percentage of a set block. So it isnt like your typical coin where the first to mine will generally get more coin at a low diff.