This is, I feel, the best way to handle difficulty and balance:
Most of the enemies have set levels of various intervals around the world, i.e. Wolves will only range from levels 1 - 5 say, but level 5 Wolves will be found in deeper parts of the forest while level 1 Wolves are found closer to towns.
Some enemies have a single set level no matter where you find them, i.e. it doesn't matter if you find a Spriggen in a swamp or in a forest hill, it will still be level 30.
Some enemies, and in this case the fewest, will always scale to the player at a set variance, i.e. Dragons will always be 3 levels higher than you, Dragon Priests will always be 5 levels higher than you, etc.
Along with that the world needs to be far more dangerous based on the difficulty, not only the difficulty of the game but also of the enemies you will be facing in a said area. For example, traps need to be far, far better hidden, much deadlier and come in far more variety. I never, ever feared the poison dart trap, not even at level 1. Why are there no null magic areas when creeping through a Dragon Priest lair? I don't think I've ever encountered a spike pit that I could actually plummet in to if I missed my jump.
I believe the difficulty needs to be set in three different ways rather than just the single slider; Enemies, which would scale their damage/armor, Intelligence, which would scale the AI and Environment, which would make the world a deadlier place.