I like the alliance size restriction as well but there are negatives to it. The primary negative is that this restricts player agency. Another is the fact that this, currently, only applies to forming an alliance. Once the alliance is formed it can still grow beyond the limit and make for the same situation that is currently had. Which means either a new form of automatically enforcing this will need to be implemented or an occasional manual enforcement. Otherwise, the limit will actually benefit the alliances that grow beyond the limit by weakening their competition.
An alternative idea would be to allow however many alliances people want but instead make penalties (which is what OP mentioned with the topic of soft cap vs this hard cap). For example, once over the limit, all realms in the alliance bloc would have a decrease in acceptable baseline tax rate proportional to how much over the limit they are. Along with that add in some negatives to region morale/loyalty/control and a limit could be more "naturally" enforced. The question would be what would the effective limit be at this point. If the penalties kick in at 33% then when do the penalties become enough of a detriment to break the alliance (50%?) or weaken it enough to allow others to realistically challenge it.
Another alternative is to do a combination of both. A hard cap at say 50% of the island and then a soft cap (start of penalties) hitting all realms at 25-33%.
