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The idea would be, when you have enough players banded together (10, a 100? I dont' know exactly) they can make a city, which is a faction like the "realms" in DAoC.
You get a "realm" created for your faction. Basically, an instanced part of the game world with city gates. There are quests and mobs inside your realm, just like in DAoC, so you can level, craft etc. No one can enter the city gates except members of your faction.
If you leave the city gates, you're in the frontier, where it's PvP against all other factions.
Like DAoC in the frontier there are forts. If you take over and hold a fort, you get bonuses, like special dungeons that open up to your faction.
I would make it so you can attack anyone that is not an ally. If you ally with another faction, then you cannot attack members of that faction, and they can enter your city, and vice a versa.
Hopefully, if a big faction starts to get powerful, a bunch of little factions could ally against it.
Just a rough idea.