Allowing players to change the world, in my opinion, only works one of two ways:
1) EVE Online. CCP provides in the game a baseline of content, starter and mid range bases and NPCs, but then they left "zero space" largely up to the players. Yes, zero space has asteroids and whatnot for resources, but players can put/control space stations there and more. Its a fairly hands off approach and the success of that game is entirely based on it being a niche game that gathered a very strong small following that has slowly grown.
2) A very structured designed "world change" approach that I don't think any game has really done (EverQuest had the Sleeper, but that was poorly designed). The crux here is that you allow players to change the world but all the changes are designed by you and its only the triggers that the players have control over.
Over at Brian "Psychochild" Green's blog, he made a post on Dynamic Content
back in June 07. My response (and please ignore the typos) for handling it was:
Multi-cyclical quest chains.
The scenario would run like this... when the game launches, you have a town and a camp of bandits out in the woods that are at odds with each other. Both sides have quests, each rewards with exp, faction, money, items, just like typical quests. The town gives you quests for random things as well as "spy on the bandits", "clear the woods of thieves", etc, things that oppose the bandits. The bandits give out quest like "gather supplies", "steal from town", "kill a city guard", etc. Basically, if you are creative enough you can think of tons of quests that oppose each other. Each quest completed adds to a "power counter" on the server side, and new quests pop up as the other side gets stronger. If both sides reach a certain level of power, a war event triggers, players participate, war ends when the bandits or town runs out of soldiers... if the town wins, things go back to normal, bandits are reduced to "camp size", town is where it is, minus some power equal to percentage of soldiers lost. If the bandits win, they take over the town, the factions switch, and the old "good guys" now because the resistance hiding in a cave. Now the town is "evil" and the camp is "good". Two new sets of quest chains that work like the old ones, but with a different flavor, the good guys are trying to retake the town and save the townspeople, the bad guys are trying to maintain control of the town.
When a player logs in, if the balance of power has shifted since they were gone, they'll get a page of text or a cut scene animation that explains "The bandits, under the leadership of their warlord have stormed the gates and taken the town! What forces remain of the city guard have moved to a hidden cave to plan their resistance..." and the game will log you in to the appropriate faction location for your character. But that cut scene is key, you have to make sure that major events that happened are related to the player BEFORE they actually get into game, at least on a high level... once inside you can have an NPC that'll say "The bandits make have taken the town, but we fought well and they suffered great losses." Maybe, as paul suggested above me, on the GM side have them be monitoring the status of the cycle and be there when the event triggers so they can record and post videos of it on the official site.
The problem with creating dynamic content is ensuring that it doesn't end. Every quest has to lead to "something" even if that something is to go back to the beginning. The reason I just multi-cyclical quests instead of single cycles, is that single cycles are easy for players to spot, bothers some of them, encourages others to farm it, etc... multi-cycle quest lines, especially when offered to two opposing sides in a PvP game leads to more competition.
The other thing you need to further watch out for is being intentionally not completing a cycle to deny content to the other side. If that happens at any point, you need to adjust your quests to "time out" if left undone so that given a reasonable amount of time (a day, a week, a month, etc) the game will rotate the cycle. Using the princess example, if the bad guys never kidnap the princess and a week goes by, have the princess sneak out to go horseback ridding and vanish. NPCs have just kidnapped her.
I still believe in that idea, and I'd love to see someone run with it. I don't really want a game with 100% user generated and controlled content because in my experience it usually leads to one side completely dominating the other, and I feel the game design needs to encourage competition between factions, not dominance.