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I think an your typical AAA game needs LLM-powered NPCs as much as a drowning man needs a rock. If nobody thought to give the NPCs more dialogue, filling the gaps with AI slop is not going to help.
I think an LLM might substitute for a mediocre DM in an RPG, though. Certainly in text-based formats, but possibly also in something with graphics (e.g. Neverwinter Nights). The benefit would be that it could accommodate player character ideas. So rather than saying "You can not play a lycrantrophic half-elf changeling", it would modify the setting. Perhaps figure out how the fey fit into the cosmology and the overall plot. Invent relevant side quests, just like a human DM would.
The problem with this approach is that presently, if I have to pick between a pre-generated character with a questline written by humans (BG3) and a character of my own invention with quests written by AI, then I would much rather stick to BG3. Likewise, even if I were totally into dinosaurs, it seems highly unlikely that I would enjoy a version of Tolkien's epos where all the non-hominid animals (horses, ponies, eagles, black wings, dragons, spiders, etc) are replaced by appropriate dinos better than the original, simply because AI is nowhere good enough to write something like LotR from the scratch.
Ah but the typical AAA game is not Baldur's Gate III.
Mass Effect Andromeda. Or Dragon Age Veilguard. Or Concord. This is what I'm thinking of: https://x.com/celestesangels/status/2003911076988260714
https://x.com/deadlock/status/2015887428964266047
An underlying issue is that the people who can't write good dialogue surely can't write good prompts or lora/finetunes for AIs either.
Still, some fun can definitely be had in a version of LOTR where Saruman is shilling NordVPN: "50% off with code ISTAR15". I saw an AI make a great pun about Isengard's no-logs policy.
Trying to replicate the peak of human literature should not be the target for AI gaming, better to focus on things that only it can do in terms of reactivity and dynamism to create new kinds of fun.
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I was using chatbots to help me train dynamic Japanese vocabulary recall or whatever. Discussing random topics with it wasn't working, as those tended to focus on abstract vocabulary. I had the idea of trying to play RPGs with the AI, with the AI being dungeon master and posing scenarios I would need to use more concrete vocabulary to interact with. Should have been simple, right? It's got all sorts of RPGs in its dataset to crib from. Anyways, the results were one of the many things that totally dispelled any illusion that LLMs possess intelligence for me. I can't provide a total summary of its extreme and numerous flaws, but everything it tried to do as dungeon master ended up being cliché, nonsensical, unstructured, inappropriate from every point of view, and it quickly lost context of what was going on after only a few prompts. You could probably create a much better virtual DM through pre-LLM computer generation technology.
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