Aces, Kenyon Midgets (just to add to your confusion) run basically the same setup as a Legends car, a 1200 air-cooled Yamaha with a u-joint flange welded to the countershaft sprocket, albeit in a Midget chassis and running to a quick-change rearend. I can vouch for the power loss of the "conventional" setup vs. chain as, even with my ancient old GSXR 1100 I could easily out-drag a Kenyon out of 2 & 4 at Montpelier.
Discarding your transmission concept aside, I hope you now understand a little bit more how closely the D2 concept relates to what you're trying to get going, and how the goal is to offer a platform that relates to the "National" Midgets in exactly the same way your idea relates to a USAC 410; economical, and comparatively inexpensive and user friendly, only with some of the diversity that we Midgeteers seem to inexplicably crave...