on one of my first islands i once had like 5 shops. but yeah latter on they do become very rare. also i think keys stop generating after a certain level, I was able to find them after loading a game and going to a low level island (at least level 5), but i never find any after a certain level.
about the balance
I've had almost the opposite experience. when you get ragdolled, enemies just stand around and wait for you to get back up. and I've found armor to be quite effective at reducing damage. a full set of armor dropped by enemies in the current level is usually sufficient at protecting you from being insta-killed, and some non-skeleton npcs can drop gear that is a bit higher level than the current area for lower level areas.
you will eventually find shops, and when you do, they will usually sell gear that is stupid powerful for the area (even the shop in town can sell some strong gear for early levels). to the point that items in the current, and next areas are almost always worthless in comparison. also i end up accumulating loads of gold that i never end up using until the rare occasion I encounter a shop, where i usually have enough mid game to buy whatever I want.