I listed already several things which make players come together to make settlements on the PvE and PvP servers. Maybe what I will do is elabroate on those items I listed to define better how they contribute to a "functional city" that makes sense to you.
1) Protection against monsters--or players on PvP servers
....Functionally, this means lots of walls/gates and efficient movement so defenders can help defend. On Pvp servers this means all variety of weird exploit constructions. Usually very extreme time consuming things.
....On deeds, there'll be lots of NPC guards wandering randomly. They respawn automatically. Keep in mind deed guards can't move through walls, so they will use gates and doors.
....To elaborate on this point, the end result of all this is the game starts out very dangerous, but as you join a deed or make one yourself and hire guards and gain your own combat skills and equipment, the game starts to be much safer. At some point in a player's progression, danger from monsters is very small. Especially when they have high skills and good items and a horse. To great extent, you might say Wurm Online is less about survival and more about building, as you progress further. HOWEVER, this is not true on the PvP servers. There're tremendous threats on the PvP servers, no matter how strong you're.
2) Get things done faster if you work with someone else
....Functionally this means players working together. Working at a Forge is like being at a bar. I've routinely worked alongside other players when I was in settlements. It also means desiring efficient movement, like good roads and smart placement of buildings.
....Below I try to explain more about WHY players work together...
....Many skils are dependent on other skills. For example, making a boat means using smithing and carpentry and mining and tailoring and ropemaking and a few others. The fact players can train as many skills as they want as high as they want doesn't prevent players from oftentimes trading with other players. This is because raising skills is very time consuming. Odds are, you'll have many prominent crafting skills which you have negelected. Some examples of prominant crafting skills are mining, blacksmithing, weapongsmithing, leathermarking, animal husbandry, animal taming, masonry and plat armour smithing.
....Players can also build things together and this is generally true even if their skill levels are different. So this means two players working on a boat are going to finish it faster. Boats require a lot of time to make so it's very helpful. This can also be true for walls and houses and fences and bridges and many other things. Almost everything takes a lot of time to make.
....Skill interdependence and players being able help each other make something is what makes trading such a big part of things if saving time is important to you. This is the major reason players make big boats. They'll make a lot of bricks or dig a lot of dirt or some other bulk item and load it in the boat and then transport it to the buyer.
....If players split the cost of the deed between each other it's easier to afford it. This also allows htme to split the responsibilities of maintaininng it and constructing it. It would be a lot more time consuming and expensive to achieve on your own.
3) Social... some people just want to be with other people, talk to them and be part of a community
....As you say, players roleplay cities. They want their settlement to be city-like.
....Players like to make big creative/intridicate things to impress others. In a settlement you can get instant reaction to what you make because everybody is near. And the more visible you make it, the more likely they'll see it. Players love to "beautify" everyting.
4) Sharing of resources like silver (currency) or responsibilities (like repairing or recruiting or something)
....Idk what to say about this. It's similar to (2).
5) if one of hte players is high skilled they'll imp your junk and make you uber
....It's a legitimate reason to be in a settlement, but functionally it's just interaction.
Roads: The way you make roads on your settlement and where you put things will impact the efficiency you move stuff around. In Wurm Online, travel isn't cheap. So this will definitely impact the layout of a city. Generally, almost all settlements are flat. This is mostly the case because buildings require tiles to be flat, but it's also true because slopes slow movement speed.
I'll try to give you an idea of what settlements in Wurm Online look like by explaining what they need.
Generally, there're these things you need:
1) A place for your deed token--generally near the center
--On the pvp servers lots of walls surround it to protect it
2)
(LOTS OF AREA) Paved paths/roads intersecting everything important--for moving faster
3)
(LOTS OF AREA) A mine to get mined resources (like Iron)
--The mine will also have hte forge which produces the refined metals
4) Access or near proximity to a body of water for using a boat
--This might use a large area on PvP servers. On PvE, players can't steal boats. This means on PvP servers players build rectangular pond to keep the boat. When they want to move it off the deed they will put it on a transporter and move outside some stone houses to unload it onto the water.
5) A private place to keep your stuff--generally this is a house and every other member will have a house too
--Your private place will also probably have a bed for getting the sleeping bonus
6)
(LOTS OF AREA) A farm for crops and a generally a bulk bin and food storage bin and maybe a small house to store what you produce
7) A well or a barrel or fountain with lots of water in it--you find these usually in the mine or near where everybody goes
8) Lots of gates--generally for fenced/walled areas
9) An oven for cooking food--generally near the farm
10) A place for coal making--doesn't have to be a big area but need room to see individual piles
11) A place for a trash bin or maybe a couple places
12) Loom for tailors
13) Lots of barrels/chests/etc for organize
public dropped items... these are usually near crafting stations (like forge)
14) Lanterns/lights for lighting the settlement and the walkways
15)
(LOTS OF AREA) Fenced areas for animal husbandry--breeding animals like horses
16) Altars for the religion system--some players make full scale churches (mostly for roleplaying I think)
17) Some areas for potted plants or trees or other beautifying arrangements
18) A kiln for pottery or keys
19)
(LOTS OF AREA) Walls to keep monsters (or players) out and to keep a house writ from decaying.
I bolded
(LOTS OF AREA) for things I think REQUIRE a lot of space in a settlement.
Because you can put a lot of items in a container and put a lot of containers on 1 tile and because teh game doesn't have collision detection for items then YES to some extent you can pack a LOT of things into a very small space, meaning it may not be very house-like or city-like. Playres usually make it city-like anyway because it both maeks it easier to see and it's easier to click on.
So the functional similartiies between a settlement in Wurm Online and RL is different primarily because:
1) Settlements in Wurm Online are almost always flat because deed owners want to use every tile on their deed to not waste $$$. While digging is time consuming, it's worth the effort to most players to make it all flat.
2) No collision detection for items means players can cram stuff into a small area, meaning big houses are more aesthetic than functional
--However I forgot to say I think only 1 bed can be on a tile. And only 1 person can use a bed.
3) No simulation for how weather affects the body, so being indoors won't give you benefits
4) Players come together in-person usually when using crafting stations like Forges/Ovenes/Kilns/etc. They're the closest thing to a tavern in Wurm Online. Crafting stations are put nearest to the resources and within short distance of other things.
--Because we have global chat there's no real reason to chat with other people like at a tavern. There has to be a material need and generally crafting stations are hte greatest material need
EDIT: I forget to mention another huge reason players come together is for information and guidance. This is especially true for new players. It's just practical to get this in a settlement, not server chat. For one, in a settlement you can SEE what works without even asking a single question. Supplying a new player protection from dying is just the beginning.
I know when I started (on Serenity) I imediatley joined several players making a small village. It's a cherished meory. I had to figure out where to meet them which involved running around and almost getting lost. I met someoen and sailed on a boat as passenger. I was mesmerized by the shoreline and mountains. I saw our HQ. Several houses arranged near the shore with a big boat being constructed. I recall a campfire at night and all of us around it eating and chatting and planning. We even unearthed a "dungeon" aka. ruined mine. I eventually left (escaped?) because I felt threatened.
(The reason I felt threatened is laborous to explain. One of the guys wnated to raid other settlements and I didn't want to creat enemies yet. Another person also thought I had stole some of their stuff, even though I didn't. They were all on a boat asking me to come along and raid with them and I said no and sneakily collected all my things in a cart and just left into the wilderness. I was still a noob and the wilderness was veyr dangerous at the time. I was also lost. But I loved it. A long story short, I found myself on a far away shore learning how to make iron lumps when I decided to go to Chaos. I've been there now for over 3 years. And btw one of the players was named Radni. I have nothing personaly against any of them. They just apparently didn't trust me.)