This idea would be pretty neat! Scraped ideas tested during the development of previous Smashs' usually are applied to the next game, so I why not? I won't buy too far into this, but the Mega Man trailer shows him bruised, sparked up, and cracked, so that may just serve as an indicator right there even if we haven't seen any real evidence.
If it's implemented though, it should happen as damage stacks overtime with more severe or noticeable damage happens at higher damage.
Of course, I don't expect the Smashmosphere to be hyper-violent or even show traces of blood or gore. That would just ruin it.
Just reflect on this little gem here.
Anyways, speculation time:
Anna: Ponytail gets cut off, clothes show rips and tatter
Andy: Hair becomes unkempt, clothes tatter and show sweat stains, wrenches and mech become cracked, sooty, and emit sparks
Bayonetta:
Becomes completely naked and you can see everything! Hair becomes tattered, dark aura permeates off clothes, clothes show rips
Black Shadow: Horns crack off, helmet cracks, visor cracks and partially shows eyes, armor cracks, cape shreds and falls off
Bomberman: Bauble tears off, clothes and hood show rips, X bandages and bruises on face
Bowser Jr./Shadow Mario: Shell dulls, spikes break, knot tears off, X bandages and bruises on skin, handkerchief shreds and falls off, paintbrush cracks, bristles tatter, Shadow Mario's paint composition becomes unstable and starts bubbling
Chrom: Armor shows cracks, Falchion shows cracks, shoulderplate cracked and knocked off, hair becomes unkempt, cape shreds and tears off
Dillion: Armor dulls and bruised, cowboy hat gets knocked off, handkerchief tears and falls off, skin shows bruises
Ghirahim: Fringe gets cut off, hair becomes unkempt, scarf rips off, clothes show rips, skin becomes bruised
Jack Frost: Sockets on cap tear off, collar ends tear off, skin becomes bruised with a few X bandages
Isaac: Hair becomes unkempt, scarves tear off, armor and sword shows cracks, clothes show rips, aura bleakens
Isa Jo: Hair becomes unkempt, clothes show rips, laser sword starts to blink and spark as well as metal showing cracks, skin shows some bruises
King K. Rool: Skin becomes bruised and shows X bandages, cape shreds and falls off, jewel cracks, crown falls off
Krystal: Hair becomes unkempt, cloths show rips, tiara breaks off, staff shows cracks
Little Mac: Gets black eye, bruises, and X bandages, looses teeth, gloves show tears, hair becomes unkempt, clothes show sweat stains and wrinkle
Masked Man: Helmet cracks, eyeglass cracks, clothes show rips, sword glow dulls and sparks
Pac-Man: Gloves show rips, shoes show rips and details and soles peel off, X bandages and bruises on skin
Palutena: Hair becomes unkempt and shreds off at the end, laurel falls off, staff and shield crack, dress shows rips, metal becomes cracked, stockings show rips, sandal straps become loose
Ridley: Skin shows bruises and dulls, wing flaps get holes
Robin: Hair becomes unkempt, coat tatters and shows rips, end of cloak shreds off, hood tears off, sword shows cracks, magic becomes unstable
Saki: Knot unties and hair becomes unkempt, clothes show rips, laser sword starts to blink and spark as well as metal showing cracks, skin shows some bruises
Shulk: Hair becomes unkempt, Monando Blade emits sparks, cracks, and blinks, armor cracks, clothes show rips
Skull Kid: Clothes tatter, hat gets knocked off, Majora's Mask's expression become more intense and starts to twitch then eventually falls off, showing the avian face of the Japanese model
Takamaru: Clothes show rips, knot falls off, katana cracks
Toad: Mushroom cap becomes bruised and has X bandages, clothes show rips, skin becomes bruises
Waddle Dee: Bandana shreds and falls off, spear shows cracks and splinters, X bandages and bruises on skin
Walhart: Horns of crown break off, hair becomes unkempt, armor and axe becomes cracked, cape shreds and tears off
Waluigi: Hat gets knocked off, moustache dulls and droops down, overall straps become loose, clothes show rips, bruises on skin