This is awesome. LLM-powered NPCs is one thing I'm most excited about in the future of gaming. Characters repeating the same scripted dialog over and over again is one of the biggest immersion breakers.
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I'd argue throwing a game wrapper around an LLM is a new LLM experience, not a new game experience.
Once someone decides that will be a critical and fundamental part of a AAA game, the rest can be worked out despite what will be I am sure many unintended emergent behaviors.