With the assumption that Everything is Canon,

definitions:

Real World: Where Mario and Luigi grew up

Mario World: Where the majority of the series takes place

Lets tackle the Mushroom Kingdom

Origin of Mario and Luigi:

Origin of The Princesses:

Conflict between Bowser/Koopas and the Mushroom Kingdom:

The responsibility of the Princesses:

Mushrooms:

Yoshis:

any thing else I missed.

please feel free to discuss, but keep in mind the principle of Occam's Razor.

"the fewer assumptions that are made, the better."

Taken from the Super Mario Wiki of the original Super Mario Bros story, which I guess explains the original conflict:

"One day, Bowser invades the Mushroom Kingdom. He and his Koopa Troop are jealous of the kingdom, and King Bowser decides to take it for himself. To do this, Bowser casts a spell upon the kingdom and transforms all of its inhabitants into blocks, weeds, and other objects. It is foretold that only the Mushroom King's daughter Princess Toadstool can undo the spell. Knowing this, Bowser kidnaps her. Fortunately, the Mario Brothers learn about the Mushroom Kingdom's problem and race to its rescue.

The player takes the role of Mario or, in the case of a second player, his brother Luigi. The ultimate objective is to race through the worlds of the Mushroom Kingdom, evade Bowser's forces, and save the Princess."

http://www.mariowiki.com/Super_Mario_Bros.

I'm like 80% sure Princess Peach isn't a Toad. Bowser might've originally kidnapped her because she had that magic, but his repeated kidnappings could be cause she basically the figurehead of the Mushroom Kingdom. 

Basically like kidnapping the Queen or something.

I think whats actually happening is that the world have been overrun by an alien species called the Toad and they have taken over the human race! But they kept a few to do experiments and So Princess Peach was born! But Browser, seeing what the Toads have done couldn't stand for it so he "Kid Napped" Princess Peach to reason with her (as well as other things Fap). But the Toads could not let this happen and Browser and his army was too strong for them so they made Mario and Luigi to do their bidding for them!

And the only reason why we get to play as Toad in some of the Mario's is so that the Toads can make sure that the Gang isn't rebelling against them!

But there are so few humans and what happened to Pauline?!

What about Daisy?

Princess Peach is a deadbeat mother and Bowser is trying to make her take responsibility for their spawn, meanwhile the two guido morons she's been leading on for years slum around vandalizing the other kingdoms and beating her children in fits of jealousy.  The mushrooms are a form of sentient genital warts that sprouted from her body.  Other things.

Her name is Toadstool. So at least it sounds like she has been "delivered" by Toads.

Mushroom Kingdom is everything.

I always thought humans were just one of the species that inhabit the Mushroom world, just like the toads, yoshi's, koopas, etc. but maybe it could be that they came from the Earth XD

The Princess needs to get better security or think of moving somewhere safer.