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Level
A skill based system is the same as a level based system, only it doesn't look like it.
Level system: Joe wants to be a warrior. Because he wants to be a warrior, he will naturally gain strength and hit points as he gains experience.
Skill system: Joe wants to be a warrior. He picks up a sword and keeps slaying monsters to raise his sword skill, and keeps getting hit to raise his natural defense.
In a level system, progression is based on class so that stats are optimized for a certain type of character as he levels up (INT for mages, DEX for rangers, etc).
In a skill system, the player is any class he wants to be, simply by practicing what he wants to. This allows greater freedom, with the possibility of making a "bad choice" by focusing on mediocre skills. It also allows players to experiment with the "best" combination of skills and try to find something a Tank Mage, who can cast anything and attack anything without any problem.
Thus a level and class system is used to restrict players into roles so that they are efficient but also balanced. A warrior will naturally suck at magic because he's chosen to be a warrior.
In other words, you need to take the extra time to test a skill based system and make sure it is balanced with drawbacks so that no one becomes too overpowered. This is why magic users typically have low health and high magic attack, thieves have quick light attacks and rely on dodging but can't equip heavy armor, and hybrids such as fighter-mages have some versatility but are not as focused and excellent as a pure fighter or mage.
While a player starts out generic, his or her actions through skilling up will define the character in a "class" of some kind, even if it isn't explicitly stated. The guy who focuses on hand to hand combat will be a martial artist, etc.
Measuring and comparing skills of one player to another or to a monster is tricky. You can have a dynamic system that judges how difficult something is based on a rating system, but there are always exceptions. Neverwinter Nights used a sort of dynamic "con" system where it judged how difficult an enemy was. It worked, though enemies that are mages were usually rated as extremely powerful even when they weren't, because mages have the potential to do great damage, but in reality can be hacked down quickly.
A skill system done right is a beautiful thing, but balance always has to be in place. Examples:
-Someone specializes in swords. They can do great sword damage, but lack defense. -Someone specialized in defense. They can take damage, but can't do much. -Someone specializes in swords and defense. They can take some damage, and do some damage.
-Someone specializes in magic, but can't use swords very well. -Someone specializes in swords and magic. They can use some magic, and do some moderate sword damage. -Someone specializes in daggers, but lacks sword skill. -Someone specialized in daggers and swords, and is average in both.
Now typically, "better" just means a higher number. But if you're creative, better means what abilities your character has to signify increased skill.
Example 1: Sword skill of 5 equals 8-15 extra damage. Example 2: Sword skill of 5 equals parry ability, fast attack ability, sword anticipation ability, piercing attack, weak point attack, etc.
The first example is easy to create because it's abstracted. Most RPGs use general numbers to represent everything, with numbers meaning "the character went in to frenzied combat with a ton of blocks and parries and showed excellent sword technique to deliver a clean attack through the opponent's armor" even though you never see it. The problem is, people only focus on the numbers themselves.
Numbers are important, but they aren't everything. Look in the D&D Player's Handbook under feats. As a character becomes stronger, they learn more feats such as double attack or called shot or back stab, which allow them to do more in combat. They are the tools that a player has to make himself more effective.
It depends on how you define progression of skills. Rather than saying a fighter-mage has less magic attack power and less sword attack power, you can instead say he has half the spells of a full mage and half of the attack abilities of a swordfighter.
look at Dragonwarrior I as an example of a solo hero who can handle verything himself. He has great defense, attack, healing, and attack spells. This is great for a single player game where you are the hero who conquers all, but how fun would it be in a multiplayer game where EVERYONE can do this?
You'd end up with powergamers, or Tank Mages as they're called in UO. It's someone who's optimized every skill to be an unstoppable player. Somoene who tries to focus on being a healer or mage would be slaughtered by someone with excellent attack, defense, and magic. Everyone copied this and tried to be a Tank Mage in order to be "the best," which defeats the purpose of character customization and choice.
In the RL example, you have two disciplines that a person is focused on, programming and design. The person may be excellent at both, but it takes him more time to exceed in two disciplines compared to someone who programs exclusively and someone who designs exclusively.
But the guy who programs and designs can use the two things he's learned together to make programs that are smart from a design perspective and design that's smart from a programming perspective. So his skills crossover and complement each other. He's a hybrid who uses both in combination.
Now take an individual programmer and an individual designer, and put them in a room together so that they have to use their skills together. You have two focused specialists who combine to make a more powerful whole.
Programmer/Designer = 10000 hours of experience Programmer = 10000 hours of experience Designer = 10000 hours of experience
Assuming everyone spent the same amount of time learning, the programmer and designer team would be able to do more advanced things by teaming up. The programmer/designer is capable of soloing, and doesn't have to rely on another person, so he has a wider range of skills with less focus. Of course he can team up with others to make up for this.
Now take someone who's an artist/programmer/designer/network admin/electronics engineer. He has a huge variety of skills but lacks focus in any to become an expert. He may have one skill stronger than another, or he may have a near evenly distrubuted spread of skills, but he isn't nearly as focused as a pure programmer who's spent all their time focusing on programming only.
Now the hybrid character can try to raise all his skills, but it will take much longer naturally. Also, systems can be in place to limit his maximum capability for learning, so that his skills are capped eventually even if he does try to raise them to a pure focused level. Or, he is allowed to raise them as much as he wants, but automatically delevels opposite skills such as strength vs intelligence. Or, a penalty is in place when he tries to raise a skill too hig, reducing stats or restricting advanced abilities.
While these are artificial limitations, they prevent characters from levelling everything to max. And it will happen, as players will spend hours trying to raise one skill until they're "perfect."
Disgaea has classes that have A-F ratings for weapons for different classes, showing how high a class can gain skill points in different types of weapons. A special class can later be unlocked that has an A in everything, which makes the game too easy due to his uber-powerful-leetness.