I'm surprised no one has considered the obvious and easy fix. Just make the challenge rounds drop tokens and have a store for each challenge type so you can buy what you need. As others have said, certain items just wind-up being wasted would we desperately need others.
So change it to tokens and a store. No limits beyond costs. Need to buy thirty scrapped of slippers? Ok 300 tokens.
Idk what the exchange rates should be but obviously cost would scale to colors. Though given we have scrap cost inflation not too much.
Using arbitrary numbers. Whites cost 5 greens 10 blues 15 purples 20 and oranges 25. Now perhaps it would need to be a range per type say a 5 point spread to accommodate the"better" scraps used in later rarity levels.
But if insane gives 4 oranges 27 purples and 1 blue. That'd be about 580 tokens instead which could be turned into about 23 oranges or 29 purples of your choice per run.
That'd take some of the sting out of leveling up.
Now as I said the numbers might need to be tweaked buy getting 5-6 tiaras or diplomas not just 1 for full day's worth of runs would be far more satisfying.