My 2 cents:
There are several elements of good RP. People have often mentioned no god-modding: this is when you set your character as almighty and practically invincible. Then there is bunnying: when you RP another person's reaction. And then there is one more thing: following the setting.
MD used to have a setting: it's a distinct world of its own, whose inhabitants are people who were strangely transported to this world, landing on the paper cabin, meeting Marind and then deciding what to do, what role they want to take up in this world they are brand new to. Back then, roles like dragons, elves, demon etc was even frowned upon in the game concept, as you can see [url="http://magicduel.com/index.php?pag=presentationtext"]here[/url]. If you see the people who were chosen to be RPCs back then due to their roles that was deemed unique and suitable to MD, you could see that the most "roles" is closer to what they were doing, rather than what imaginary background or species they claim to be. For example, we had Thanasia who became a priestess after leading prayers, Alche who became a principles amalgam due to his adventures in Mt. Kelle'tha, RJ who became the drachorn master for adventuring inside the drachorn cave. Of course it's not that roles that include imaginary species does not exist, we had at least one metallic rabbit RPC in the realm, but it was not the shapeshifting, fire-ball throwing kind. This was way back then in MD.
Then with the coming of the first Festival, there was a large influx of a new kind of roleplayers. They take MD's "you can be anything you want" and interpreted it as meaning MD is a freeform RPG: you can be whatever creature you want and throw fireballs whenever you want. There was a large influx of roleplayers with this mindset and for quite a while, this type of RP flourished. But as a result, the setting of MD that used to exist is quite often ignored during this period.
Either side can argue which one is right, but with the revelations that happened rather recently, both sides really should have been reconciled. In terms of setting, MD is much more flexible than most RPGs: people are even allowed to alter the setting to a degree. As shown [url="http://magicduel.invisionzone.com/topic/6955-a-show-of-force-1-part-2/"]here[/url], MD is a world where everyone's fantasy world is merged. Its reality is a mix of its inhabitants reality: when something becomes a reality in the majority of people's minds, it becomes real. This is perfectly reflected by the "RP reality level" system. When everyone there believes something, it becomes real. As people have different concepts of what they can accept as reality, it's easier to make something real when there is only few people there, but it gets harder to get everyone to think the same when the number of people increases.
You mentioned that there are a lot of strenuous rules and restrictions in MD; I think it's inevitable. There's no rule about RP-ing when you're with like-minded people, as whatever you believe [i]is [/i]reality, but when in a large crowd, those restrictions reflect the fact that the reality is not changing according to your fantasy, because other people does not accept it as their reality.
I would also like to comment on the opinion that it's hard to find RP in MD nowadays. True, you don't see as many blue texts nowadays as a certain period back then, but it doesn't mean there is no RP in MD. As some people have said, RP is not just about blue text. For quite a lot of people, playing MD IS role playing. When they walk, talk or do anything, they are role-playing, even if you don't see blue texts. Even without extensive made up background or race, people can RP. If you look around MD, you can find RP all over the place, although it might not necessarily be the type of RP you think of.
So now we get to my point, since ideas are requested to "revitalize RP". My suggestion is: do more RP that is acceptable to more people in general. Just like an RP needs to be very real and fact based when a lot of people are present, the opposite is true. A place that have a more real and fact based RP will be acceptable to more people, and allows you to draw in from a larger pool of people to populate the place.