I've used them, and essentially in the two methods you laid out. . .i.e. gaming the diminishing returns logic, or doling the items out to others. . .and a third. . .of an elderly mentalist, body worn out, embedding their physical/in the field skills into items to give to his grandson/apprentice. . . .those ranks of martial arts end up not being so useful for the 95 year old, but for the 30 year old, very handy.
The only instance in which I ever saw it put to large scale use, was an instance where a a group of mentalists had overdone merge into mentalist and become a hive mind. . .in which case the hive had little care about retarding certain sub units in order to jack up certain others or it's hirelings/retainers, as it looked at all the individual mentalists as parts of itself.
As an aside, in games where "DP in place of XP" was the house rule (i.e. you get DP instead of XP, and every time your DP/40 or DP/50 went up 1, you leveled) these spells took on a different nuance. . .the character actually embedded the ranks, in effect reducing their spent DP, which could cause them to go down a level. . .when you get up into the diminishing returns levels, it can be a decent strategy to earn DP, go up a Level, embed ranks into an object causing you to go down DP, losing a level, then earn back those DP and repeat. That's out into house rules land though.