"When they're kids, everyone thinks there's only one truth. They think that, just like when they used to ask questions to their parents or teachers, every problem has a definite answer buried somewhere, waiting for them to find it. But, the idea that the world is finite is simply a delusion of us humans. Once you get older, you'll realise that the world is infinite." - Hieda no Akyuu, "Forbidden Scrollery"
Gensokyo is inhabited by many different creatures of fantasy. Indeed, the purpose of Gensokyo itself is to preserve these creatures against the scientific progress of the Outside World.
Firstly, it is important to understand why this is threatening to the existence of Youkai. Simply, it is because Youkai are the products of superstition. In the old days, humans would create monsters to explain what they did not understand. Here, they are called "Youkai". As humanity developed, they began to understand more about the world, and these superstitions began to die out, in favor of scientific and logical explanations.
In response to this, the most powerful of the Youkai, known as "Sages", sought out the power of the Dragon God, and together, they created Gensokyo. However, this in itself did not solve the problem; humanity still did not believe in their existence anymore, and so, within Gensokyo, there exists a single civilization of humans, within what is known as "The Human Village". To these humans, who lack the knowledge brought about by the advancements of the Outside World, Youkai are very much real. Their purpose, in the grand design of Gensokyo, is to continue to fear Youkai.
In turn, Youkai must continuously be reaffirming their presence in the minds of the human population. They attacked, kidnapped and stole from humans. The Hakurei Shrine Maiden's purpose is to "protect" the humans from these threats, for the good of both Humans and Youkai; if the Humans were ever wiped out, the Youkai would also cease to exist. In a sense, the Human Village is a Youkai "farm" of superstition. The Youkai themselves also work to protect the villagers, from natural disasters, to renegade Youkai or curses.
So, it is vital to the continued existence of Gensokyo that Humans are kept ignorant of the true nature of Youkai, or rather, the common villager is. In a game, the players must ensure that villagers remain unaware of their dealings with Youkai, and keep them thinking that Youkai are terrifying beings, only held at bay by a few skilled Humans, here referred to as "Hunters". While the villagers themselves are unlikely to react badly to finding out about Youkai, both the Hunters and Youkai will quickly disprove any suspicions of their kindness, often violently and fatally.
However, in more modern times, Humans and Youkai have begun to peacefully co-exist with one another, or at least, the ones in Gensokyo, to some extent.
Characters who are heavily involved include: