Alright, so now I've got a rough blockout of the level established in Cryengine. Thank god for the solid modeling system. And the ability to export .objs? Nice.
This is not a MMO style character system, but it should give you some idea of some of the work that goes into creating a modular character... http://wiki.polycount.com/wiki/SkankerzeroModularCharacterSystem
Check out mudbox, its pretty much a sculpting app with photoshop built in it. The stencil system in it is extremely powerful. Its also the easiest one to start with.
In addition to the Unity example, Unreal uses a similar, automatic voxel grid system for lighting dynamic objects from static bounces. Here's the docs on it for UE3.
You dont model powder you texture it or create a shader. You could create a particle system too if animating but that would be overkill for a static render