Ahh, gotcha.
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Definitely. One of the things I don't like about dragons is that it's hard to use them effectively in small numbers, but they're OP in high numbers. So we have to balance any change, so that it nerfs a mass dragon attack, without making the dragon even more useless in small numbers.
I think that's where it might be more effective to nerf the DPS, while leaving the health high. That way, dragons can still serve as a sort of flying tank, like a lava hound, but available at TH7, and it doesn't have a favorite target, so a bit unpredictable.
I've used dragons with balloons with limited success. It's still crazy expensive for farming, but cheaper and faster than mass dragons (especially since I only have one level 9 barracks).
Lower the DPS and it would still be a viable strategy. Lower the health, and it would be harder to use. Lower the DPS and the health, and it would be almost pointless.
For me, I go all out solely for the DE. Elixir and gold are easy to farm. Especially if I'm not in a rush to upgrades something, I'm willing to drop 200k on dragons plus the cost of spells. I'm all about the team and winning. It's not specifically about the loot. The de is just more of an incentive to go big or go home.
Have you considered what this would do to TH7s when it comes to attacking TH8s in wars? Dragons are the best bet for a TH7 to 3-star a TH8.
Nerfing them at levels 1 and 2 isn't going to stop a TH8 using L3 dragons on you. But what it will do is make it that much harder for you to attack a TH8. Focusing soley on TH7 vs. TH7 is a poor way to look at making a fix because it's not just TH7s attacking you in war.
TH7s are generally going to get 3-starred in a war anyway. TH7s are pushovers and dragons are far from the only thing that will crush TH7s.