This seems like a staggeringly inefficient way to develop what is essentially a FPS engine.
What AI can dream up in milliseconds could take hundreds of human hours to encode using traditional tech (meshes, shaders, ray tracing, animation, logic scripts, etc.), and it still wouldn't look as natural and smooth as AI renderings — I refer to the latest developments in video synthesis like Google's Veo 3. Imagine it as a game engine running in real time.
Unreal engine 5 has been demoing these features for a while now, I heard about it early 2020 iirc, but the techniques like gaussian splattering predate it.
I have no experience in either of these, but I believe MegaScans and RealityCapture are two examples doing this. And the last nanite demo touched on it, too.