epic, myth, and legend in roleplaying

I was taking a look at this thread because one of my current RPG writing projects is a "sourcebook" I am tentatively calling Kathanaksaya: Middle-earth. The approach I am taking is very different from the standard "How To Do Tolkien Right" perspective that is often taken in more traditional RPGs. I don't think there's anything wrong with the idea of trying to emulate Tolkien, but with Kathanaksaya being a land of stories, I felt that if I took that perspective, I'd be doing what everyone else was doing while ignoring a great part of what makes Kathanaksaya interesting to me: it is a land of stories, and stories (especially good stories) change as the audience changes. This idea heavily influenced my goals for this project, which is to give tools for players to create their own vision of Middle-earth by providing various perspectives and approaches to Tolkien and ideas on canon.

Yet, without getting into too much detail, I discovered that there are certain types of stories that really gel with the spirit of Middle-earth. One of the conclusions I reached was that for various reasons legends, epics, and myths are the best types of narrative to emulate when roleplaying in Middle-earth. For some strange reason, I don't think I'd automatically dismiss a story with Elves and Orcs wielding hand grenades and machine guns as non-Tolkienesque while I can see a story about quaint, rustic folk doing quaint, rustic things as non-Tolkienesque, even if they are called Hobbits.

Yet, when examining my liking of The Silmarillion and the last three volumes of the History of Middle-earth series as opposed to the LotR trilogy or The Hobbit, I realized that it was mostly due to the differences between these seemingly similar narrative forms. I had a nagging feeling that the reason why I liked The Silmarillion and the latter works of The History of Middle-earth had nothing to do with them being more epic in the sense that the scope is greater or that the characters were more powerful. I realized that I enjoyed The Silmarillion in the same way I enjoy fairy tales and classical myths. After further thought, I discovered that the reason why I liked these types of stories is that they touched on something more essential and universal than LotR did. When I retrieved my battered copy of Webster's New World Dictionary (3rd College Edition) to see if there are distinct meanings between these stories, I found that my initial feelings were right, but the dictionary helped articulate it better. It said that:

[*] a legend is "a story handed down for generations among a people and popularly believed to have a historical basis, although not verifiable." I put down The Hobbit as a legend not only because of its extraordinary events, but because they are believed (or known) to have a historical basis (at least, in the world of Middle-earth, although the Hobbits of the Shire may or may not believe Bilbo's wild stories).
[*]an epic is a narrative "characterized by events of historical or legendary importance." The historical importance aspect is what made me decide that The Hobbit was not an epic but that LotR was, especially considering that after the War of the Ring, the kingdoms of the Dunedain are once again united and the Men of the West become the dominant power of Middle-earth. These things are of tremendous importance to everyone involved, except perhaps those who have no strong cultural or historical ties to Gondor.
[*]a myth is "a traditional story...ostensibly with a historical basis, but serving usually to explain some phenomenon of nature, the origin of men, or the customs, institutions, religious rites, etc. of a people: myths usually involve the exploits of gods and heroes of legend." In other words, myths generally have cosmic significance. Why is there evil in the world? What happens to us after we die? Where does the world come from? For this reason, I decided that The Silmarillion fits the mythic mold more than LotR. By the time LotR starts, the physical, social, and moral realities of the world are firmly established. Yet, in The Silmarillion, things seem a great deal more flexible.
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These things raise a lot of questions, but I'll narrow them down to a few. The first is: given these definitions, what would be the particular opportunities and challenges of roleplaying legends, epics, or myths? What is the best way to represent the changes these types of stories undergo both through roleplaying and through mechanics (Kathanaksaya terms preferred)? What models (if any) of legends, epics, and myths exist that can serve as tools for helping players determine the sort of story they wish to tell?