Is Coliseum a scam?

100% a scam/pay to win joke.  They have number crunchers setting the whole thing up.  Notice how you can get tons of leveling mats, but the currency to actually level your characters is so limited on free rewards that you have to spend $$ to get more era currency.  Then, as you said, the damage just suddenly disappears as you consistently do 1 damage while the enemies will suddenly go from doing mediocre damage to wiping out your entire squad with one hit.  It especially likes to do this when you are cruising through a level.  I've been at 98% damage against a boss and then do 12 straight attacks of 1 damage so that the boss could catch up and wipe out my team.  

Sadly, Galaxy of Heroes is in its death throes as it shed massive numbers of players, so now Capital Games is doubling down to try and squeeze out the last bit of money it can before people abandon this game for good.