It does become a problem in a two party system when one party becomes too extreme for people with moderate viewpoints to consider, since the result is a de fact

It does become a problem in a two party system when one party becomes too extreme for people with moderate viewpoints to consider, since the result is a de facto one-party system (at best, or the extreme party in power at worst). And indeed, this means less of a check on the more extreme impulses of that remaining party. Whether a grassroots initiative to moderate the Republican party would be successful, I'm less convinced.