Spoiler Show---> A Skewed Perspective Solved <---
- Everything happens within the Book of Prophecies. It is the written history of things that once did happen. This part is unimportant most of the time, but it's critical to understanding certain parts of Chi.
- The Chained Realm (where Daybreak Town is located) is the Realm of Sleep, it is chained by a cycle of memories. Basically, the world is stuck dreaming the same dream (it's past) over and over.
- The Unchained Realm is the Realm of Light. The same Realm of Light that Sora and company travel through.
The right column represents the Realm of Light, while everything in the pink box on the left represents the Realm of Sleep. Therefore, the timeline of events only taking place within the Realm of Light are as follows; Daybreak Town exists, MoM studies the X-Blade, MoM creates the first keyblade and then more follow, unknown events, the Keyblade War, time passes, the Dandelion Union Leaders meet, unknown (the future which leads to the present).
As previously discussed, the Book of Prophesies doubles as a Book of History, but what is the real history of Chi? How did it all happen? The timeline is a bit confusing, but I believe that I've put it together.
Let's start before Chi, when Daybreak Town was (presumably) the only world inside the Realm of Light. The Master of Masters somehow obtains access to the X-Blade and proceeds to reverse engineer the thing to create the very first man-made replica of the X-Blade, a keyblade that came to be known as No Name. Afterwards, he finds five disciples, forges keyblades within their hearts, and then pulls those keyblades from their hearts. After that is where there is actually a gap in the timeline - we don't know what happened next. This is the true timeline, and in the true timeline dream eaters don't exist, unions may not have existed, and medals certainly didn't exist because the Book of Prophesies didn't exist. The only thing that we do know with certainty is that at some point there were enough keyblade wielders around for the Keyblade War to occur. The Keyblade War plunged the world into darkness (with no survivors) and then the world started dreaming.
"Dream Timeline A", this is what I shall name the very first dream that Daybreak Town has. It should be noted that there is nothing to stop the world from simply dreaming an exact copy of the events that already happened, not unless a foreign element starts to interact with the dream. And somehow, the dream version of the Master of Masters became self aware, he became that very foreign element to the dream - yet he was also very much trapped within it. Dream Timeline A starts with MoM studying the X-Blade and ends with the Keyblade War, once the Keyblade War draws to a close, the dream resets. Eventually the Master of Masters creates Dream Timeline B by doing things differently here and there.
Dream Timeline B ends with the Master of Masters learning a few things about the truth of the world that he's in. Dream Timeline C (we'll call it that for simplicity's sake, but more timelines could have occurred) sees the addition of a sixth apprentice - Luxu, Luxu's mission, and thus the birth of the Book of Prophesies. Dream Timeline D is when Chirithy is first born, it is also where Dark Chirithy comes from. Dream Timeline D also sees the Foretellers donning their animal outfits and forming/leading unions as we're familiar with, they are given copies of the Book of Prophesies and yada yada. After all of these dreams (at minimum) take place, we finally arrive at the final dream - Dream Timeline E.
Dream Timeline E is the Dream Timeline that we are familiar with. In it, our player is given a Power Bangle by the Dark Chirithy (our former Chirithy), and the Dandelion Plan is set into action. Those familiar with Chi's story should know what happens in this timeline, but it is very interesting to note a few things about this timeline. The Dandelion Union Leaders somehow manage to extend the dream, it goes off rails and they introduce more dream eaters into the Realm of Sleep. The Dandelions themselves are also very interesting, by allowing their hearts to be their guiding keys, they became self aware and real - instead of being mere figments of a dream, they became real people with real hearts and managed to leave the dream behind.
It is the Dandelions of Dream Timeline E that enter the True Timeline within the Realm of Light. An unknown amount of time has passed since the world first fell to darkness, but the passage of lost time only matters if the Dandelions aren't the first to step foot into the Realm of Light. Regardless, the Dandelion Union Leaders continue to lead the Unions within Dream Timeline E by entering/leaving the Realm of Sleep seemingly at will. Going beyond where we currently are in the story, they also use their copy of the Book of Prophesies to "restore" the worlds into what they are in the rest of the series.
Okay, so that's the end of the timeline. What implications does this have for the story? It raises the importance of DDD where Sora and Riku learned to dive into sleeping worlds and wake them. It also fleshes out the characters of the Master of Masters and Dark Chirithy. With the Master of Masters in particular, his carefree attitude is understandable, his motto of "Let your heart be your guiding key" holds extra significance too. Luxu speak to Ava and says "Rather than the future of this world, I wonder if the Master was more interested in how our hearts would be our guiding key?". It also explains the entire conversation within the Case of Ira. The Master of Masters wasn't interested in saving that world, there was no point in saving a dream, but instead he set his sights beyond the dream.