Alex Schroeder has a quick blog post about place names and how to handle them, and has this to say:
If the village is run by a guy called Marcel, should it be Marcelsby, Marcelden, or perhaps based on the forest or river name? [ … ] Perhaps simply waiting for the players to name things works just as well.
That’s an approach I hadn’t even considered, even though I’m always going on about letting the world be created during play. Not everything can be left for players to name, though. Kingdoms, major cities, and large regions should get names. Basically, anything NPCs are going to use to give directions or mention in rumors.
One solution to the naming problem: temporary pseudonames. Take two or three features of a place, compress each down to a single word, and add the generic type (village, forest, river, etc.) This becomes a prompt to help describe a place: “paranoid mining village” means the mines and mining paraphenalia will get mentioned a lot, and NPCs will be secretive and hostile to outsiders.
This doesn’t mean that any of the features of the pseudoname will definitely be part of the actual name, especially if players are doing the naming. They might latch onto other features, perhaps those you don’t consider important.
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