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That's pretty much exactly what I did with the gremlins in GodWars, back in 1995 - plus the top level gremlins would lay mana-restoration non-hatching "eggs", which encouraged players to farm them. However it's a very simplified approach, and not really the same as the settlement (or "monster generator") concept.
Of course that's not to say it's a bad idea, but my interest here concerns a central settlement AI which manipulates individuals members of that settlement in a believable social model, providing an opposition "race" rather than a mass of free-roaming individuals.
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