Is there any problem with giving lots of extra credit?

I think the answer to your question is "No one knows, but you are about to find out." The only thing that can be guaranteed is that there will be some unexpected consequences, because the nature of human interaction--and the diversity of things like motivation and preparation--is such that it's too complex a system for us to know what the introduction of a novel approach is going to do.

You are attempting to transfer power to the students which is traditionally vested almost exclusively in the instructor. I feel that this is a good thing, but that it is difficult to predict what people will do when given power that they previously did not have.

To give you an example (which I don't think will happen in your case, but there could be some analogous effect), I know of an instructor that tried dispensing with grade pressure altogether by announcing on the first day that everyone in the class had an A for the course [the highest rating possible, for those not familiar with common practice in the US]. The consequence that surprised him was that at the end of (or perhaps during as well, I don't remember) the course, students expressed resentment toward the policy. The realities of time pressures put on them by other courses meant that they ended up spending little to no time on the gradeless class, because they knew ultimately that it would not affect their record. The resentment came from the fact that they wanted to learn the material, but with nothing to force them to spend time on it, they ended up not giving it any time but instead allowing the other demands on their time to crowd it out completely.

In my opinion, I think you've covered your bases as well as you can (in particular, it's not a wild shot in the dark, but a further change to a previous, successful modification), and all there is for you to do is observe the effects and see what student feedback is. The most interesting question in my mind is whether the most talented students will do as well (in terms of "total learning outcome") under this system as they did under your original one. For similar reasons as the example I gave, they may just make a decision not to put as much effort in because of time pressures from other classes.