I'm not certain I agree with a hard limit on allies, but I can see where it would be interesting. And it could work.
That said, I prefer the gradual idea of making larger alliances less...efficient at doing what they do.
Possibly one way of doing it that wouldn't be a blanket "alliance does less damage the larger it gets" could be a "army is less effective the further it gets from your capital" idea. My first inclination would be to actually have that be a distance from your border idea, but that would quickly be played with by empires asking to "acquire" land closer to the fight so their armies would work better. Making armies less capable the further they roam from their capital would act as an empire-size limiter as well.
