Minecraft, Utopia, Cities, and Augmented Reality

It could be simpler than you might think. It's just a matter of projecting stuff like sprites and powerups into a simple camera viewer. Yes, a 3D one would help a lot, but simply mapping GPS coordinances should make it possible in theory.

Then what one needs is a choice of stuff like battle systems, or a careful blend between different types; and a way to execute stuff and "take hits" from successful attacks (which may factor in which direction you're facing relative to other players). Some kind of GTA-like on-screen radar would be essential however, to prevent others from being sniped. Guns? Magic? A mystical sports ball that you can kick/throw/etc. to interact? Range-limited, high-damage "melee" attacks? And of course, internet radio OST for the win.

And then, there's always the tempting "trail of coins" for taking some oddball route (like walking on the top edge of a wall, versus walking beside it). Oh, and the weird looks you get for jumping around your town, full of people that are clueless to why you're doing so in the first place.

Placing "blocks" in your town that you can virtually interact with would make no sense at all, and would most likely result in you wandering around in the middle of a crowded street. Not something I would consider "good design," unless it's with a third-person avatar or something to that effect. (Which could also be interesting in different ways than your direct interaction).