I've been fleshing out the idea of the city where this campaign takes place a bit more. As I stated before, it would exist on another plane. Planes are a common thing in D&D, and in the Forgotten Realms to be specific. Yes, creating a new plane is taking a bit of creative freedom, but sometimes one has to.
Like I said before, it would act as a gateway between different worlds, or between different material, and even other kinds of planes. Khelben, from Abeir, for example has been to Oerth, so "planet-hopping" has happened before.
Anyways, this plane would consist from this one huge city, floating in this "space". The city would be built on this rock, or rather crystalline base. Above this city there would be a huge crystal with it's tip almost touching the largest tower in the center (or thereabouts) of the city.
Around the city the space would be somewhat calm, but the farther you'd go out, the more there would be disturbances. There would be lots of these crystals floating around in that space, and mining vessels - like sailing ships that sail in space - would venture out to those crystals to mine them, and to even adventure within them, killing some exotic creatures and look for anomalies and portals to distant worlds.
The species who would own and run the city would be called "mind reavers", a distant cosmic cousin of the mind flayer, who they'd resemble in part. On this small "pocket" plane, the mind reavers would be immensely powerful psionicists, getting their power from the huge psionic crystal floating above the city, as well as from crystal shards collected from all over the plane. They would keep the surrounding space of the city calm (apart from a psionic storm every now and then), keep the city anchored to this huge crystal, keep the extra-dimensional gateways open, and keep peace and tabs on everyone within the city.
There would be a ruler in the city, but he/she/it might not be a mind reaver; it would be this menacing mysterious presence, akin to the Wizard in Oz. The ruler would have this army, this elite guard, keeping the city peaceful. Other than that, the city would have a certain amount of greater houses (although I hate to call them that, as there seem to be houses in every story), who would have their own bodyguards, some even small armies, much like in Menzoberranzan, and other drow cities. These factions would often squabble, even conquer each other, and that would be allowed for one reason or another.
The defining structure in the city would be this immense tower, hundreds, perhaps thousands of feet high, in which the ruler, as well as the elite psion guard who'd keep the crystal in place and the "seas calm" would live and stay most of the time, and in the base of it there would be the elite guard of soldiers. Then there would be a tight-knit network of larger roads, back alleys, housing, and so on, with all kinds of different districts, such as market, guild, arena, rich housing, slums, docks, and so on.
One of the prominent districts would be somewhat smaller, with some kind of a special structure, and immensely high security. This would hold the gateways. The gateways would be reseved for the use of the rich and the powerful. However, out there in the sea of psionic storm there would be portals as well, and experienced captains could sail through them with their "flying" ships (which would really look like sailing ships.) These ships would then bring over people from all kinds of places, and those people would mostly stay to the docks, which would be your typical seedy place.
Of course underneath there would be a huge sewage system with catacombs and tunnels and all that goodness.
While the police force of the city would be powerful, as well as the rich factions and their guards, they wouldn't be all-powerful, and enterprising thieves and assassins would obviously thrive in such a large city as well. There would be guilds for both, as well as guilds for all kinds of classes and artisans.
Now, the "benefactor" of the player group would lead one of these prominent factions or houses in the city, but he would be very different, in that he would actually be human, and not mind reaver. However, he would, as it turns out, be an extremely powerful psionicist. Having him be human would allow the players have a bit more "warmth" towards him, and not want to rebel against him straight away.
Now, as far as the missions go, there would obviously also be the possibility that there would be small missions within the city, even venturing out on a ship to the crystals in the neighbouring sea of psionic storm, ridding the sewers of some extraplanar rats, and even take part in a faction vs faction attack. However, I was wondering how to sell the part of doing these missions on the arena, or rather in a "virtual" way.
One problem would be, how could they keep what they find as drops, if it's all virtual? I mean, of course they could simply be rewarded afterwards, but it's always more fun to loot corpses. Perhaps there would be a way of having the items materialize. Perhaps the arena would have to be for battles and more straightforward missions, much like simply for entertainment, for scientific trials and so on, and then have actual excursions to the real world, with perhaps some kind of exploding neckbands or something. :)
Anyways, this is the gist of what I'm thinking.