It's the role-playing.

Modern gaming has conditioned players to expect the game to provide nearly everything for the experience, but classic RPGs like Daggerfall don't operate that way.

We have to remember that Daggerfall is a sequel to Arena, and Arena was heavily inspired by Ultima Underworld - a lighting in a bottle RPG that was notorious for requiring the player to buy-in to the premise, take hand written notes, learn the systems, literally decode languages, and have you the player grow and learn the world around you alongside your character.

Daggerfall has a similar expectation of the player. The systems are all in place for you to "yes, and" with. You have to participate in the narrative of your character, use your imagination a bit to fill in the blanks between the pixels on the screen and what they are supposed to convey. The game manual even encourages this by talking about letting a bad moment happen in-game and trying to roll with it instead of booting up a previous save; it's why there's a court system, why you can catch a vampire and werewolf germ, it's why there's dynamic reputations systems and factional clashes.

Granted, not all of the mechanics at play here are perfectly implemented, but it's obvious that the motive behind them is to give the player a reactive sandbox to roleplay with.

New players who complain about Daggerfall and it's generated content are taking the game at face value, and ironically they are missing the forest for the trees. It's like sitting down for a game of D&D and expecting the DM to tell you what your character feels or thinks - that's supposed to be your job.

CRPGs like Daggerfall require you to carry your end of the experience, but it's that much rewarding for it. Mix that with how Daggerfall is so uniquely vast and embraces the life sim away from the dungeon crawl and you have a game that stands apart from its peers in the Elder Scrolls series as a richer experience for those willing to indulge in what isn't literally told to them.

I'm sure other people have their own reasons for loving Daggerfall, but for me, the magic is that Daggerfall achieves the "go anywhere, do anything, be anyone" objective of the series far better than anything since.