Game Mechanics Mediumcore death should drop a treasure bag containing your items to reduce drop spam especially in multiplayer.

[daedaLus stormNo]

For the Truth's sake:

Fighting is mandatory for true ending in SV.

Spoiler

Monster Eradication goal, lol

Fighting is a soft (yet barely avoidable) requirement for casual ending in SV.

Spoiler

One can't raise Combat skills without doing combat. So -2 Evaluation points from Grandpa (because skills are not maxed).
Some other requirements, like getting Skull key, is soft-gated behind fighting. Played too much time ago, can't recall it on the go.

Of course you can go Joja route to try to avoid most of this. It will be tedious and exceptionally resource-consuming. Hundreds over hundreds of Stone, for starts...

As far as I know, some lost items can't be recovered in SV at all. Notably, all quest items except XLR sized shorts.
Almost everything in Terraria can be re-obtained eventually without invading another game world.

Just because fighting is required for perfection doesnt mean the game is completely built around fighting like terraria

 

[EustaceCS]

the game is completely built around fighting like terraria

Random Terraria enjoyer: yes, Terraria is built around fighting entirely. Other features don't exist or don't have enough support.
Also, literally first non-menu text at Terraria.org:

Dig, Fight, Build​

Terraria itself:

Yes, Terraria is a fighting game like nothing else...

 

[Glasia 🌳]

Dying in mediumcore should drop your inventory as a kind of treasure bag with a rarity of 0 that if collected and rightclicked contains your items. This is also to prevent abuse by item spam in multiplayer and creating lag by dropping too many items. At least implement it in multiplayer due to item spam as I said before. Why rarity of 0? Because if it happens to fall in lava, everything is lost in mediumcore

May be linked to Game Mechanics - Medium-core Players should have their items stored rather than dropped

Perhaps having everything burn is a bit evil. Let the molten equipment and other similar items survive?

I've always thought this mode would be better if you only risk losing a few items (randomly) but not being able to recover them. Risk = Fun

Imagine if you die there is some kind of angel NPC that holds your items and gives you them back if interacted with.

After assessing your improvements I concluded:
On non-FTW worlds - an Angel NPC (a trav merchant type NPC that does not despawn on world leaving) having your items if you interact with him. Then the angel disappears.
On FTW world - a bag that has your item but is at risk to be destroyed in lava or due to crashing getting lost.

 

[Glasia 🌳]

Possible sprite for the angel that holds your item.
If it is going to be an angel, make it also invulnerable to any mobs, so that you can guaranteed retreive your items without drop spam.