I've played many games with many different forms of player advancement. I think each has its merits, but I am not wholly certain which is the best. I certainly have my favorites, but I think each should be looked into.
1. Traditional Leveling: This is the most common and basic form of player advancement. You kill so many mobs and you gain a level, eventually reaching a level cap. Each level makes you more powerful, and unlocks access to new skills, talents, and gear selections. This kind of advancement has permeated every facet of the gaming community, including FPSs, like Call of Duty. This game style is great at hitting the rewards center of the brain, and keeping players playing for just a little longer to get one more level. This style must do something right as it is literally everywhere.
2. Item-based levelling: This style is rarer, and is entirely dependent on what kind of gear or items you have. Your character is nothing without his equipped magica or sword of world-breaking. This kind of levelling is usually used in addition to another form, to add on an extra layer of advancement (such as in WoW, where you can be max level but not maxed out in item levels).
3. Skill-based leveling: This is rarer, but your character has a variety of skills that increase as he progresses in the game. This can be as simple as Eve online's timed training or as complicated as Entropia Universe's skill increases from use. The former is merely a count of how long the player has been subscribed and how well his attributes are optimized and the latter is a tribute to how much the player has played.
So what is the best form? Well, it has to fit the game mechanics. I personally like the skill based leveling approach. I feel it awards long-term commitments to a game, albeit at the cost of alienating new players in many cases. I like the feeling I get from playing a character who has gotten better at mining because I've been mining, and better at shooting a gun because I've shot a gun. I don't like arbitrarily having my character be more powerful because I've killed enough bears to earn a new level. I also feel that skill-based leveling is more of a gradual approach to increasing in power.
More Development Journals will be coming, as I finish fleshing out the skills system for it. I am working on a very simple demo of the crafting interface and how the crafting methodology will work. It will not be quite the same as the finished product, but I want something for people to tinker with if they want to provide feedback. Since crafting will be a core mechanic, I want it tested thoroughly during the design process.