You let the players themselves control the content. Second Life does this. Eve does this, but very limited. As far as open endedness, I think the best way is to design a framework world which does have certain physics and rules. You are hands off for the rest.
Did Napoleon have the planet rating to capture those worms
Traits/skills do better than levels, though. That, I am convinced of.
When I get to part three in few days, I do have what I think is a workable solution.
Yitzi, the difference between skill systems and level systems basically comes down to scaling. Under a skill based system, you build your character fairly quickly, and he doesn't change much, stat-wise, once he is established.
They support different kinds of narratives. A leveling system is good for stories in which characters start out as barely distinguishable from the rest of the population, but end their stories as godkilling combat machines. A skill-based system is better for stories where your character gets his skills from his background, and the story is about the use of those skills, not their steady progression. Essentially, to use Anime analogies, level based is Dragonball, which is all about Training Ur Pwr Lvl. Skill based is more Cowboy Bebop or Outlaw Star.
Eve Online/ Dust 514 is a modern example of a totally destructible item environment. It works pretty well. Only problem is it's skill system and combat system. (btw... Russians love it...) My only deal with it is that it takes FOREVER to be useful. They have a real time skill system to pilot any ship. For some ships like, say, an asteroid mining barge you can fly competently in about a month. Huge "deathstar" type Titans, years. There is a huge divide between veterans and noobies. If you can not fly T2 ships, battleship or above, there is much you can not do. Unlike the ship to ship combat system of Star Trek Online, Eve is just orbiting at your weapons optimal orbit and trajectory and whoever has the highest skill or best weapons wins. There is no strategic targeting of guns or shield generators, etc.
BUT... Eve has one of the most dynamic economies, politics, and just deepness because of it's sandbox. Seriously, they write academic papers on Eve.
But, as sandboxy as it is, Eve does not go far enough. You still do not have total interaction with planets. You can not just fly by with a Titan to a planet with Dust marines and alter tides while nuking entire portions of continents. (They say they are working on that, though). You can not do space walks. They have an avatar, but for the most part, your Avatar is a spaceship. I can not strap on guns and park a ship in a station and be a gambler in a space cantina. Nor can I be both a marine and a fighter pilot. Shame too. They paid those kids at White Wolf a lot of money for a state of the art Avatar system to walk in stations and do stuff just like that. Only thing is many of the playerbase play Eve like a 4x and have multiple clients of star ships. The beautiful walking Avatars interfered with managing fleets of 2 to 6 ships and did not interest the players. they had to abandon it to where the only thing you can do on foot is hang in a captain's quarter.