I love the ideas so far!
For campaign progression, I'm thinking:
Tier 1: lvl 1-3 is standard fair adventures: helping merchants, doing tasks for Nobles. This is a great time to establish everything in the world. I want this place to be completely bizarre (because it's limited only by the Mage's imagination) and normalize those things for the Players. Weird, Dr. Seuss-like trees, maybe the world is a flat disk as described above, surrounded by a strange sea. Anyone who sails out gets lost or just returns to the place they left. Crazy laws etc...
3-5 is where they start noticing that things are not perfect. While I'd give clues to this at early levels, bring it more to the foreground: weird happenings, erratic weather, crops failing. At this point they might be working for someone who points them towards the exit....the illegal thing, the place no-one is allowed to talk about, or something like that. Maybe, at this point, they discover the world is dying.
5-8: Outside the Demesne. They discover the outside world. It is unlike anything they know. But it's livable. A place for the people to settle...but there are strange locals. These locals have their own stories of the 'catastrophe'.
8-12 They range further afield and learn that there are other cities (destroyed or not). It's here that they realize their homeworld is delicate, slowly deteriorating pocket dimension. They are now dealing with a main antagonist that is equal power to their 'God-King' and are trying to save all the people in their world. Maybe they are dealing with the original threat that their people fled from, or maybe that is dealt with at higher levels if I ever go there.
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I'm thinking that the original settlers worked closely with the mage. Maybe set up a counsel to make decisions for their people. Each counsellor represents a city/province from the outside world or is based on the races that were saved. I'm leaning towards the former. Over time, these became 'Noble Houses'. They became very influential. At some point, people wanted to leave. The Noble Houses didn't want to risk losing their power and prevented the others from leaving. They influenced the wizard. There was a rebellion and it was quashed. Since then, the heads of the Noble houses or the council are the 'Mouths and Ears to the God-King'. They changed history which is why there is no records to prevent future rebellion which is why there is no memory of what actually happened. Even if the people are safe to leave the domain, the ruling class won't allow it. The mage never wanted to become a god but the ruling class use him as such to maintain their influence and power.
I like the idea of the Mage Dying. That's why the world is cracking. I'm thinking of statting the Mage as an Elder Brain. There's nothing left of his body. Essentially, the Mage no longer makes decisions for the world. He's just a brain that keeps it working and the council manipulates it. But, maybe, there is something left of the mage's personality. Maybe the PCs convincing the remnants of the mage to release the people is one of the ways to set the people free...
I like the idea of limiting spells to 3rd level (especially since they will be leaving the demesne by the time they are 5th. I'd probably also outlaw conjuration.
Still processing some other ideas from the posts...I'll included them in a separate post.