You either have cheating or you have unavoidable unfairness due to lag. Even with the system that tracked damage and doled out loot accordingly (which is the fairest way you can code it), those who cheated to get advantages, and those who have faster systems, do much better. There is no way to be truly fair to all players. The only thing you can do is take out the predictability of where the loot is. That would call for a totally different way of doing things.