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I'd be happy with hard level caps based on amount of badges.
The bigger problem is story progression.
I can see them doing vignettes per town/route and then doing a culminating story at the end.
I think the best option would be to split the story up into two or three main portions and have those portions play out in select towns.
For example the Professor's story beats are in towns 1, 3, and 7, where the Rival's story sections are in towns 2, 4 and 8, etc.
That way you're not stuck to just Dragon Quest-tier vignettes, you keep the open world and main plots can run alongside the open exploration.