After reading the discussion in the comments of "Roleplayer as Puppeteer" between Alda and myself about how tabletop roleplaying works and the different sources of, and ways of arranging, story in roleplaying, Caoiliann describes how her group goes about MMO roleplaying.
Roleplay In Action: Caoiliann's Way
I can't deny that RP within the MMO game world is limiting, in that you can only use and do what's available within the game mechanics. However, I think it's a disservice to act as if our imaginations turn off the minute we turn the game on. The MMO isn't everything and letting it replace authorship as to what is possible or feasible based on in-game limitations is a mistake. It doesn't have to be that way, though.
The way my people and I have always run our game RP is with two somewhat concurrent pieces of the same overarching story going on at once, some on forums and some in-game. Things that are better left to walls of text full of description and action happen on the message boards; the complex conversations and interactions happen in-game. The two parts work in tandem to form the plot and a consistent game world.
They're not always synced up perfectly, but when you have a good group that knows at least the general direction of the resolution of the yet-unwritten parts, it's never been difficult to forge ahead or drop behind the forum's main plot, or to just go on tangential side plots that involve a smaller subset of the actors.
I think that this requires a great deal more coordination than anything that a DM would run, of course. In your setup, the DM sets all the pieces up and then lets the actors go wild exploring it, which has a certain amount of appeal. In our game-related setup, you're sharing authorship with at least one, and usually many, other people for the overarching storyline, where only a point A and point B are established common places for each section to begin and resolve. It's a lot more work for everyone involved, but I have to say that it has been exceptionally rewarding and fun despite its challenges.
It's definitely not the type of setup for a control freak. The ringleader of this three-ring-circus (usually me) can't truly exercise any more control than painted lines on the highway: there are strongly suggested boundaries, and good places to be passing on the left than others, and here's the desired speed limit.
But from there, the control goes back to the rest of the actors, and it's up to them to draw that map from A to B as a collective. I can't control the pace and can't keep them inside the lines. I'm not the DM, just the name on the back of the historical archive of stories.
There is definitely risk involved in that. I have to trust them the same way they trust me to make it work, and we have to be willing to make mistakes sometimes and make allowances for that. We've all retconned a little every now and again or sacrificed what we thought would be the MOST AWESOME IDEA EVAR for our own character for the greater good of the plot.
I'm not sure it could work for every group of RPers - it takes a high level of honesty, trust, and a strong belief in the value of the people in your group, and more than one or two bad apples who are too "me" centered can make it difficult if they're not evicted or successfully written out. We definitely saw those kinds of attitudes aplenty in AoC, which is why things struggled to function. However, in CdIO (and in the "reformed" HC) this has very rarely, if ever, been a serious problem.
It's an art, not a science, and it is far from perfect. I don't think it's ever run perfectly. But the outcome has always been wonderfully, completely rewarding, and it gives everyone a sense of ownership and pride that sticks with us.
That's not to say anything about whether tabletop or DM-run RP is good or bad, but it is honestly my defense about how herding RP cats in my limited MMO world can and does work with the right group of creative, generous people.