At the exact moment of Y2K, an evil clown, now known as "Fallacy", somehow got access to the source code of the universe. They downloaded a copy of the concept of humans to their own brain, then replaced the original with the collective works and records of all mythology and folklore, and even some modern literary works (for reasons still unknown; then again, this whole debacle in-and-of-itself is known of only by Fallacy themself).

BIG SURPRISE !!!!
deleting even a tiny piece of the foundation for literally everything ever, then replacing it with literal literary fiction,
hecked up all of existence through sheer butterfly effect!
Only the clown remains human; everyone else became some flavour of anthro/furry, or a plant-/fungus-/mineral-/whatever-based equivalent.
Divinity, magic, psionics, and soul-based superpowers also came into existence.
How much of that was intended by Fallacy -- if ANY of it -- is currently and will likely forever remain unknown.

In the understandable ensuing chaos, the world order collapsed and was replaced; most notably, Fallacy's empire, the Bigg Biff Theatrical Troupe, is an oppressive yet whimsical performance-themed supernation, creating a paradoxically efficient global power that stands alone as the ringmaster of this absolute circus of a planet.

[also all of this started as an MLP/Sonic AU, somehow....]