I run a pretty involved dynasty league. We have a $500 salary cap which we use in the auction.
Each player signed in the auction is given a 4 year contract at their auction price. You can cut a player at any time and hit the waivers using blind bids with whatever room you have under the cap. Players added by waivers get a 2 year contract.
At the beginning of next season the contract years are subtracted by one. After the season teams can cut as many players from their roster as they like - typically in mid-August. There are no salary escalators for the keepers. Once you sign a guy he's yours at that price until the contract reaches one year.
When a player has only one year left on his contract (waiver pickups only for the first couple of years). He is a restricted free agent. Before we start our regular auction we hold a restricted auction. Players are put on the board and everyone but the team that owns his contract can bid. Once the bidding is over the owner of the restricted player can match the new salary at a 4 year contract or release the player to the high bidder for a new 4 year contract.
I have actually had great success keeping the league intact as well. We are in year 6 of this format and I have people actually on a waiting list to buy a franchise because the rule format is so different than your average league.
If you are interested I have the league rules in a word file. Post your email and I'll send them to you.