I set up my own server that's on when I play and I invite people to... Damage is working on it properly. The enemies can be killed... with... weapons... Unarmed, sure, they can pretty much pwn you but that's a given. You guys have duped enough diamonds to make a diamond sword for everyone, no need to let them get killed.
But yes, they will die.. probably a lot. That's the spirit of the game, and it's why you have chests.
The one thing I want to know is how to build an Obsidian portal. Also, is there some kind of mini-map you can add to your own client? That would really come in handy.