I could see how having no levels would work. Your skills would basically dictate how powerful you are. For example, if you are 5 in one-handed, you can take on rats or mudcrabs, but maybe can't feasibly defeat trolls until that skill is at 25 or so (I picked these values arbitrarily). Granted, it would mean running or avoiding a lot of creatures or areas until you are more proficient. As for the stats, every time you level a combat skill, you'll get a health increase by whatever appropriate value. Likewise, when you level magic skills, you gain magicka, and when you level stealth skills, you can gain fatigue. This would eliminate the need for level scaling and solve the problem of magically appearing creatures in the world, and could possibly contribute to a nonlinear system of weapons and armors so that iron and leather or fur may actually have benefits to be as viable as glass or whatever throughout the game. Perks could be awarded and chosen from when a certain skill level was reached, similar to past games. I think I could live with this setup,
I agree with everything here, right up until:
but it would lead to more god characters since you could become good at everything. Unless of course, there was an arbitrary cutoff point for skill gains...
I dont' see that as the case at all. The game could be balanced just as it is and simply skip over the level up bit.
Regarding skill increases - there's no reason to speed up the rate at which they occur. They'd nominally occur at the same rate they would anyway, so that would remain the same.
Regarding derived attributes - if, for instance, leveling up requires ten skill increases and grants the opportunity to add ten points to health, then simply set it so that each skill increase grants one point of health (or magicka, or stamina, as the case might be). Just have all of that going on in the background all the time. Set the incremental increases low enough that they work out to the same basic increases you'd get at level up, and it'd remain balanced.
The only issue remaining would be a maximum level of skills and/or maximum number of perks. I've yet to come up with a satisfactory way of dealing with that.