Righteous Fire in POE does exactly that. In fact, that’s the entire point. You alight yourself with “Righteous Fire”, that burns you for a % of your life and energy shield. That burn is spread around you in an AOE, doing damage again based on your life and ES. The trick was to scale enough % regen to survive the burn, and then stack life, life, and more life, so that all your character was really doing was walking around, burning, and you were clearing maps.
Regardless. Cough. Sorry, tangent. Obviously I vote for 1, mostly because I think 2 just exacerbates the existing issue… Unless you trap the player casting it within it, which just makes it useless for a different reason, IE, GD has nothing that really runs away from you that would make it needed/useful.