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.
Armies already become weaker as they travel farther. Equipment damage and morale penalty are current major concerns and to top it all off, you have gold issue.
There needs to be a way to deal with mega alliances. Federation should just be removed from the game as it promotes a certain kind of game play that the devs don't want to see. As for mega alliances, it needs to have some serious downsides to discourage alliances that are larger than 2 realms. There aren't that many realms left when you get 2 alliances with 3 realms each. If the game had 20 realms, it wouldn't be a problem, but no island has that many. Even then you will just see bigger alliances. I am not quite sure where the game is heading at the moment to be honest. The devs might clear things out a bit.
