Here's a strange idea for a game that I just thought of.

The game is an Adventure/RPG hybrid; RPG battles, bot adventure game style puzzles and tasks. The twist is two factors that might interact oddly:
1. You start out powerful, but when you level up, you get weaker. (This is the opposite of what RPG players are used to.)
2. Certain basic tasks have level requirements. For example, maybe you need to be at least level 3 to talk to a person, or level 8 to unlock a door using a key.

How does this game idea sound? Do you think it could work? (I could see it working with a suitable story explanation for the way leveling works; maybe the protagonist becomes more human as they level?)

I've read quite a few books where magic is a) a finite ressource or b) comes at a certain cost (taking something from you). This should work in games, too. Just give the character a special power that draws it's energy directly from the character. The world depends on you using your special power to fight an evil. But every time you use your power, it'll consume a part of you. In the end you're just an empty shell, dragged along your path by your loyal followers.

This'd make gameplay pretty interesting. You don't know how much of your power you'll need in coming situations, so you'll always have to use it very carefully. Throw in some "either use your power or you'll permanently lose one of your companions"-moments and you'll get a pretty intense game (you don't know how much help you'll need from your party in the end/when you're growing weaker).

In relative terms, it's already commonplace. Look for instance at all the space invaders games where the enemy ufos get faster and meaner at each level. Just switch the narrative around, claim that they stay the same but you're getting slower. Same gameplay, opposite perception.

All the games where difficulty ranks up as you progress could de "re-phrased" that way, with no change to their gameplay. Now of course, most games keep the same difficulty all the long : you upgrade your abilities at the same pace as the baddies, for a false sense of progression - there again, only owed to the flavor (10x more powerful gun vs 10x more solid monster belly, same action and reaction). So, switch the flavor around. Regress as you face weaker opponents (fleeing the stronger ones, in an FTL-like chase maybe), and you can even have a freeroaming world à la Morrowind (with shrinking safe areas propelling your explorations) or Oblivion (everything levelling down with you).

So, the gameplays are basically already there, hidden under different wordings and displayed numbers.

This one is quite close to your idea. However, what's the point of this daydreaming? Are you planning on developing something?

One could explain such a mechanic of the character getting weaker with a curse or a disease.
Minimum requirements for basic tasks like using a key sound like a bad idea to me. Social ostracism could work though. At the start of the game you're a respected member of society, but the sicker/weaker you get, the more excluded from society you will be ("You look like you might have a contagious disease...stay away from me!"), until you're put into quarantine,

These are the two pieces I find very interesting.

Perhaps you begin as a powerful demon. But you were once human. You are on a quest to renounce the demon influence and regain your humanity.

At each level up, you have to choose what ability to give up.

You would always be asking the question, What can I give up and still progress?

I think it could be a very compelling game.

Yeah, it could work. The explanation is the easy part (everyone remembers Arthas in the Frozen Throne campaign). The hard part would be making it playable without some metagame knowledge. You don't want the player to get stuck constanly beacuse he deleveled wrong skill, so multiple ways of solving quests are necessary.