For years I toyed around with lots of different software, different methods, different ideas, etc trying to make a good heightmap but I never had the opportunity to test it out. That is, until recently when chtujo contacted me and told me Daggerfall Unity actually draws its height information from WOODS.WLD, rather than a simple heightmap image. I still had FiryWoods around, a tool that lets you edit WOODS.WLD, although chtujo made his own tool which I haven't had the chance to try yet. I also had World Machine installed, as well as my old files for editing the heightmaps. So everything was in place to make this happen.
The process is detailed in short on the Nexus page's description.
The terrain has very natural transitions between areas, is decently interesting without being cartoony, and is fairly faithful to the original. It is also tweaked for and intended to be used with Nystul's Distant Terrain mod. There are some issues, however.
1. The terrain is very noisy/bumpy pretty much everywhere. It just doesn't look good.
2. There's a lot of missing detail. I've replaced the noise map with a high quality version of the heightmap, however, I have no idea how to make it actually reflect on the terrain as extra details. There's a pretty significant difference in quality between the heightmap (800m/px) and the noise map (160m/px) and a lot of details such as river valleys are lost.
3. There are no more lakes. I'm sorry for killing them off. Daggerfall and Daggerfall Unity use sea-level heights to form lakes, water doesn't form on any other height. If I kept it as is, there would be a bunch of massive pits all over the landscape and not only would it look ugly, it would throw the erosion and river simulations off. So I just leveled them with their surrounding terrain.
I hope this interests some of you, I'd love some feedback. If not, at least there's some pretty pictures.
Many thanks to chtujo.