You're on to something. I tried this too, a few months ago, with offline Ollama/Magistral on Mac. "You're a dungeonmaster for a single player adventure game, with me as the player..."

It lost track of things almost immediately. But the foundation was there.

Maybe if we had a MUD-tuned model...

If it has an approximate way to track state, and a "pre-caching" method where it can internally generate an entire town all at once, room by room, so hallucinations are rarer... actually starts to sound like a traditional DM's method of world building for a campaign.

Maybe something like an LLM-assisted Inform (interactive fiction engine). https://ganelson.github.io/inform-website/

Side note: been playing Aesir, then the Aesir 2 MUD since 1994. It's still up!