I would definatly NOT limit the physics engine.
TBH I think the demo does offer too much, and thats why i played it for so long. I got my PB on BL1 XRT down to 1:24.9 before I bought S2. S2 was well worth it though. I was amazed witht the first race that i joined. Everyone made it around the first corner! That just doesn't happen in the demo EVER. It was also funny because I had so much practice in the XFG I started winning simple combos that were easy to learn very quickly (like FE1 XFG).
The other day I wen't on a demo server for some BL1 XFG action but got wrecked within the first lap both times I started. I tried to dodge everyone, but some guy went full throttle into the second right hander, after the big straight, after i passed him around the outside. I rage quited and went back to S2
Sure you can get good races on the demo but its a lot harder than a pickup race in S2.
I think that the demo should only offer the XFG, and XRT, and Blackwood GP forward (not reverse - reverse is popular for drifters). the number of laps should be limited, so that would make drifting servers harder to run. The mode should be limited to race, no practice or qual sessions.