Part 1: Dungeon difficulty and features based on dropped item
No more discrete dungeon difficulties (Basic, Int, Adv, HM). Instead, the value of the dropped item(s) will determine dungeon difficulty, with the difficulty being on a sliding scale that allows for near infinite variation. If you wish to make an easy dungeon, drop a gathering knife. If you wish to make a very difficult dungeon, drop a big diamond. "Difficulty" means monster type, monster combat power, dungeon length, et cetera.
Furthermore, the type of item will affect the features and content of the dungeon. A weapon dropped at the altar increases the chance of dungeon monsters wielding that particular weapon or weapon type, OR more likely that monsters drop that particular weapon. Some items can increase or decrease the chance of interesting dungeon features, such as gather spots, production props, dead ends, additional floors, visible map, NPCs, mob spawn points, environmental hazards like sulfur, and so on. Certain items will lead to existing special dungeon variants (as is already the case). Possibly allow multiple items to increase the customization potential.
Examples for Alby:
Dagger --> Easy dungeon, monsters might wield dagger if applicable. More chance of enchanted dagger drops.
Bow Weapon --> Difficulty depends on value of bow, useful if you need weak bow enemies in a controlled setting for training.
Chain Blade Weapon --> Difficulty depends on value of chainblade, monsters might wield chain blades.
Any herb --> Increased chance of multiple herb patches.
Gems --> Creates difficult dungeon instance due to high value of gems. Small chance of metallurgy gather spot.
Gold --> monsters may have goldstrike skill. Chance that rewards are replaced with gold (bad for some, good for others).
Spinning Wheel (either housing prop or homestead item) --> Special access to insect themed Alby with Arachne boss.
Hopefully all this creates an elegant and dynamic dungeon instancing system. There will be less passes and no more need for a Hardmode back room, as it will all be covered by the dynamic system. This ability to semi-customize a dungeon using existing items will breathe new life into the dungeon system.