Honestly, the former isn't suited to roleplays. It works for novels, it's what makes A Song of Ice and Fire feel so alive. But I think such details obscure roleplaying to an extent, unless everyone involved, by sheer coincidence, happen to have a convergent vision. More than anything, though, it's the framework that's more important than the details. You can fill a world with details but if there's little overarching in it then it's hard for others to extrapolate beyond there.
Shades of Blue worked well in terms of fleshing out details because of two things within the wider framework of KHI City: The mechanics and complexities of transposing the Roleplaying Section into Roleplay Town and all the infrastructure and technology necessary to make that happen, and second was that it built upon established relationships and roles in the section, so really half the effort of world-building for Shades of Blue - the relationships and factions - was already in place with the real section, they just had to be jiggled around to fit roleplay town.
In some sense, letting anyone add whatever they want into a grand realistic universe makes it more realistic - after all, reality is a patchwork on so many different levels - but with total freedom for all players involved there's got to be some sacrifice of the creator's tight vision or well-paced and -directed stories.