Agree. This point is a big concern and is explored in the stories (the protagonist creates a "mad scientist" character that can use the LLM to invent new equipment, and then uses a lot of trial and error to find prompts that generate insanely overpowered equipment). It sounds fun to play though! Balance doesn't have to be .. well .. balanced if there are other ways to maintain fun, such as leaning heavily into the creativity & self-actualization angle. As an example, if I could have any superpower in real life, I'd love to be able to fly, even though that's actually a very weak power compared to things like teleporting that are mostly a superset of flying, but not as fun and whimsical.

Encouraging "living your dream" rather than being the most powerful might be easier to achieve in a game with coop or open-world objectives rather than one focused on PvP, but if "living your dream" could be compelling made into the primary player objective, it would pair very well with the custom powers mechanic envisioned in the story.

As an example of how this is explored in the story, one of the protagonist's friends who loves surfing has a character whose superpower is "the ability to surf anything". It's an extremely weak power but the character really loves it because they get to surf the most extreme things imaginable, just for the fun of it, including in outlandish scenarios such as surfing along the blast wave of an explosion, or even the beam of a laser - silly stuff that is fun to explore & try.

I think it wouldn't have to be VR to be fun - imagine if it was something like a Roblox-based game played on laptops. Even then, the "surf anything" power and other outlandish powers would be incredibly fun to use. Imagine if you could do almost anything! You don't have to be the most powerful player in the world to have fun. Maybe you just really want to pilot a mecha-Godzilla, or something - even though an Iron Man or Thor level super could smash it in seconds. It's still awesome!