Main plot:
A portal to the shivering isles has opened near Winterhold (a prelude to a great storm), and unknown magic is coming from there.

It tempts residents to go through the portal. Because of this, the city is almost empty, and only the College of Winterhold is trying to save residents from hypnosis with its spells.

We follow the advice of Augur of Dunlei, and with the help of the atronach forge, we create a protective artifact/helmet that protects against hypnosis.

Having arrived on the trembling isles, it turns out that Sheogorath has disappeared, and his powerful artifacts have been stolen by unknown people.
Mania and Dementia blame each other for what is happening, there is civil strife on the streets of the city.

Camps of Zealots and heretics are noticed not far from the city. Now Mania and Dementia are partially PvP zones. People abducted by hypnosis join either the ranks of the Zealots or the ranks of the Heretics.

I suggest that the developers come up with a further plot)
Feature of New Sheoth:
You will not be able to stay there for too long: the madness scale will gradually fill up, upon filling which, you fall into madness.

Character madness mechanics:
your character can attack a local resident or a guard, and you will be finished off, or you will start drinking poisons that are in your inventory, with a logical end, or your character will start laughing, and you will simply run and jump off the abyss.

There can be many options for character madness, but they all lead to the same end.
At the moment of madness, you will not be able to control the character, but if you have a purification seal with you, you will automatically be able to reset half the madness scale. Purification seals will be obtained for completing a daily quest.
After death, you will be reborn in the starting, neutral zone.
Mechanics of madness of residents:
You will sometimes be attacked by mad residents. Do not provoke them: if you see signs of madness, do not stand too close to them, and do not look at them intently, otherwise they may not stand and attack you.

In New Sheoth, there are many dangerous mages among the residents, so keep this in mind.
New mechanics of justice:
If you attacked a guard in the territory of your faction during madness, but then the seal of purification was used, you can either pay a fine or go to prison, from which you can escape.

The stolen goods will be confiscated, and your equipment will be blocked, but after getting out of prison, it will be unlocked.
Factions:
You will need to choose a side: Heretics and Golden Saints, or Zealots and Dark Seducers. Accordingly, having chosen one of the sides, the opposite side will become hostile.

Outside of New Sheoth, all players will be neutral, because the madness magic is very weak there, but in New Sheoth it is strong, and there is complete madness.
Invasion mechanics:
From time to time, Mania players will be able to invade Dementia and vice versa, to complete a daily quest.

The invading player will be hunted by enemy players, as well as local guards, and the longer the player is in enemy territory, the more guards will begin to pursue him. The player will be able to use Zealot or Heretic disguise, but it does not work at close range.