[Exxy]

1. It relies on taking hits, if you have high Defense this means you're unable to maximize potential; and if you're running low Defense/DR to make the most of this it's extremely high risk, high reward (I.E. one of the more viable glass cannon methods, which even then it can be walled by high DEF/high RES depending on which damage source you're more concerned with). If the person-on-fire doesn't queue the fact they're a Narcus user and you need to be cautious of your DPS, there's not much hope to win to begin with.
2. Fire is the most counter-played element with a good number of Resist methods, ways to turn it into HEALING, there are also ways to nullify Narcus' on-hit effect (see Steel Aura from BK's tree).
3. "You deal as much damage as your enemy deals to you," is misleading in the fact like previously mentioned: the damage from a Narcus is -still- affected by Defensive Values.
4. Like Lolzy said, numbers would help (and I don't mean to cherry-pick them with a high STR build VS. a squishy character). Attempted band-wagoning with no proof or comparison(s) made from other viable damage methods or mention(s) of existing counterplay leaves a sour taste in my mouth for this thread.

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I think for the most part it's fine; although I'm not a fan of Dragon Swords being compatible with Material Change Kits considering Low Accuracy and niche Fitting Form opportunities were a limitation/trade-off for these swords -until- one of the most recent changes (which made them much more viable). At the very least, we could see a change that removes changing their Material from Dragon Remains to be an available option (which this I believe would be a needed nerf for them - albeit slightly off-topic).

If I had to suggest a nerf for these, it would be to reduce the scaling from 1:1 for Damage Received:Effect Damage to 1:0.75 (I.E. you take 100 points of damage and gain LV 75 to the On-Hit Effect). Halving it would completely remove it from the current metaplay.