Caldera: Magic
The world has always had magic in it, but not a lot. Often, when people gathered for some great cause, when they wanted something with all their hearts, miracles happened. They thanked their gods and goddesses for these miracles, and made great sacrifices in their names, so that the next time they needed to call upon their divine protectors, their prayers would be heard.
When people began to build great cities, the magic got stronger. It took many centuries for the scholars to figure out that there was something besides the divine at work--and, really, the debate rages on. The leading theories explain that masses of people living close together releases magical power from the earth. This is partly true.
The entire truth is that most large cities today are built upon powerful amplifiers of magic. When the earth was formed, giant clusters of crystals formed deep underground. Over time, people happened to build cities near these crystals. They built cities in other places, too, but given a magical city and a mundane city, which do you think has the best chance to survive the tests of time?
Today, the largest cities are built on great amplifiers. Caldera is built on one of the largest, and one of the most exposed. Its crystal caverns sit a few hundred feet beneath the lowest levels of the city, and magical water surges through them and gurgles up through the rock and then down the falls of High Caldera to form the Cerul River.
Caldera's magic is strongest in the lowest levels of Minotaur (the oldest part of the city, buried deep under layers of new construction). It remains potent within the city itself, and sharply weakens in the farmlands inside the crater. Outside the walls, the magical effect recedes to nothingness.
The powerful forces created by the magical feedback loop in Caldera have created two new universes: the plane of nightmare, where your worst fears come alive, and the plane of reflection, which connects every one of the city's shiny mirrors.
Magic in D&D
The strange rules of magic affect D&D 4E characters and monsters in interesting ways.
Proximity
Character level is affected by proximity to the city. In general, characters have levels over 1st only when they're in or near the city.
The magic in the heart of Minotaur is so strong, PCs gain 10 temporary hit points if they take a brief rest there. Leaving the city for more than a day causes temporary loss of one character level, which is restored after a full rest in the city. Leaving the crater entirely causes the loss of one character level per day until the character reaches 1st level.
Power Sources
All power sources are magical. That is, player characters are magically-enhanced beings. Arcane magic is a contrived kind of magic, powered by thought and artificial constructs that wizards and the like dream up. Divine magic is similar, though more pure, in that pure thought and belief shape it. And (so far), the world has not experienced psionic magic, which is the purest way to work magic. Primal magic is a kind of reflected magic. Characters who use the primal power source draw their energy from the world around them. The martial power source is a kind of magic, too. Martial characters allow their bodies to be infused with the magic around them.
Monsters
Many monsters and most high-power NPCs would not exist without the enhancement of magic. Creatures and people who have left the city all know that their power depends on staying in the city, or at least the crater.
Monsters are constructs from people's nightmares. If the masses get excited and frightened of the rumor of some kind of night stalker, their terror can amplify the magic and create terrible night stalker monsters. When those monsters murder people, the populace becomes more frightened, and the greater fear makes those monsters stronger. Only strong action of brave individuals can destroy the monsters and calm the people.
Cosmology and Planes
The cosmology of Caldera's universe is relatively simple. There's the earth and its universe. The earth has pockets of magic caused by crystal, and the magical power there is magnified by the thought patterns of creatures living nearby.
Deities are not real--well, they're real only in the sense that they are creations of thought patterns of sentient creatures. They are not real people, however (at least not yet). They are ideas formed from mass agreement of their divine form. These ideas are very powerful and create effects in the world similar to those you'd expect from distant, abstract deities.
Other planes: There is a co-existent ethereal plane throughout the world, even where there is no magic, but magic is required to go there. The city's magic makes the plane of shadow real. This is a co-existent plane that exists only in the city. The astral plane does not exist (Devas share a mental link with living people, not the souls of their ancestors). There is no feywild or anything similar (Eladrin and the like do not come from there). There are only two other planes: the plane of reflection and the plane of nightmare.
Every mirror, every still pool of water, every polished steel shield is a potential portal to the plane of reflection. This is a sort of virtual world where everyone has an alter ego (with a different race, class, and level). Whenever a character enters the mirror world, the player can create a new 1st level character (and level him up independently of his main character) or choose any mirror world character he's played before (and retain the levels that character has earned on previous adventures). The plane of reflection is full of glassy corridors and mazes, and shining portals that lead out into other mirrors in the city. A very clever mirrorwalker learns how to get into locked places that happen to have mirrors in them. The catch: when you exit a mirror that you didn't enter, you remain the same as your virtual character. To be restored to your old self, you need to exit the mirror you entered.
The plane of nightmare is a horrible, twisted version of the real world. It is an agglomeration of the worst dreams and fears of the people of the city. Where Caldera is crowded, cramped, and claustrophobic, Nightmare is worse. Where the dark places of Caldera is ridden with frightening monsters, Nightmare is plagued with them. It is a kind of dark hell. Sometimes people get dragged into the plane of nightmare at night by their own guilty consciences. Some people learn to use Nightmare as a way to face their fears and remove curses. There's a tenuous connection between that plane and the real world, and scholars are only beginning to understand the practical uses of it.