I have some ideas there, actually. (I eagerly await the day that you all tremble at the sight of that sentence)
We could try running ourselves a proper penal colony, no magic users allowed. The problem there would be managing the logistics of the place. Chances are, it would be nothing like a prison by the time the second criminal overseer comes around, and that's even assuming that the guards don't all wind up dead. And prisons have tons of rules, most of which are virtually impossible to enforce on the players.
I've long fiddled about with the idea of building a surface fortress. Not a palisade, like we have here in Demongate, but an actual goddamned fortress. Basically, Castle Helgard. Or the headquarters of the Knights. I considered building the thing myself for exhibition purposes, but had neither the patience nor the free time. Especially the latter. If we're going for the Knights, factionalism isn't too far behind, and would serve to show that they aren't the paragons of virtue they claim to be. Among the good knights would be corrupt, arrogant assholes, entire splinter factions in disagreement with one another, and even the Masters themselves could all have their own agendas.
A dwarven shipyard could be fun, and even works in this universe. The dwarves travelled across the sea to reach the New World, after all. This could also fit in nicely with MDFI's idea. A coastal settlement that would basically be a dwarven Port Royal, with a waterfront district of pirates, drunks, whores and peddlers. So that's two hundred dwarves with no scruples in a place where scruples are detrimental to survival. The intrigue writes itself, almost like in Steelhold.
If we're up for a sequel, we could properly mod in the Bloodkin, generate a new world (preferably with the proper art symbols thrown in, like the Saints and the Lords of the Bloodkin), and get started on Steelhold III. It could run parallel to Demongate history-wise (there are probably other continents other than the Oracular Plane and whatever the hell this one is called), or it could be yet another few hundred years forward. Might even seque nicely from Demongate, if the ending goes as I've envisioned.
...Note to self: discuss the particulars of that ending. Dammit.
Either way, factionalism wouldn't be too hard to implement there. Ideas be a-brewin' in my thick skull as we speak. We could also mod pretty much every race in small ways for the sake of fun and flavor, to show that elves and goblins and humans on other continents have developed different cultures. Even additional races representing different cultures would work: nomadic human raiders, elven seafarers, even primitive-agricultural kobolds would be interesting. Adding custom tidbits to dwarves could work too, even if the dwarven presence in that world is comprised mostly of the descendants of immigrants from distant shores. Again.
As for what I'll be writing: a scene set in Saint Zane HQ is in the works. I'll try to write the damn thing fast, but there will be no progress today, as I have work that needs doing.
On another note. MDFI, don't go on work binges too often. Experience dictates that it never works as planned. Eventually, chances are you just wrote 20 pages of pure gibberish. Always plan some time for massive editing. That being said, best of luck to you, mate.