The purpose of this essay is to show that there is at least room in the events of the SI MQ for both theories to exist more or less side by side, with some qualifiers, because I feel that this is a much richer and devious way of looking at Sheogorath who, according to his own religious texts, is very deceptively cunning.
The CoC went insane. I don't believe there is anyone out there who won't agree with that statement. It's incremental and everything, but you'd have to be quite insane to become or believe you've become a god of Madness. Unfortunately, the trouble with insanity is that the truth becomes highly mutable. Therefore, anything anybody says about the subject can be refuted by the "or Sheogorath was just pulling one over on the CoC" theory. It's sort of akin to the whole answer to any 'why' can be "because God made it that way." It is beyond my ability and inclination to argue against such arguments, so I will not. Suffice to say, yes I am fully aware that a lot of my argument can be refuted by saying "or the CoC was insane and dreamed the whole thing up." There is little I can do about such an argument; not because I'm fighting overwhelming proof, but rather because I'd be fighting an inescapable counter-interpretation.
Last thing before I proceed to the actual meat of what I'm saying: I am not going to bother talking about mantling on such a basic level. This essay assumes two things: first, that the progression went CoC, Divine Crusader, Madgod. Second, that you are familiar with the concepts of mantling and the whole "Walk like them..." business. If you don't, no offense intended but you shouldn't be reading this. Still with me? Okay, then we'll begin.
First, the door in the Niben. The ability to invite people into a Daedric Prince's realm is a very large loophole in the barriers of Nirn. Now, before people jump down my throat about how Oblivion destroys Lore, let's examine this loophole like it actually exists in the ES canon. Because it does. Haskill's words are all we have on the subject, but they suffice quite nicely.
Because my Lord wills it to be so. It poses no danger to Mundus; no compact has been violated. It is a doorway, an invitation. Perhaps you will accept it for what it is.
Well, naturally, the door isn't on a large scale and it isn't making such attempts. But, it is luring adventurers away and turning them either into corpses or residents. If the door is there, and its intention is to lure people onto the Golden Road, then it is indeed threatening the Mundus and therefore cannot exist. Intentions are second only in importance in the ES world to symbols, as the former feeds off of the latter. Sheogorath couldn't have opened a door with the intention of stealing away adventurers. He had to open the door with some other intention in mind, namely inviting adventurers inside and the best one would become his champion. If their minds were ill-equipped to handle what was there... well, they knew exactly what they were getting into beforehand. The fact that they now belong to Sheogorath is a bonus. A side-effect. Honestly.
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Sheogorath, in one of his many rants, mentions how he was going to make something new out of the CoC in order to thwart the Greymarch. In a cosmic metaverse where everything is just a myth echo of something else, that is quite ambitious. In order to do so, the CoC had to mantle Sheogorath. In doing so, he goes on one huge symbolic journey. First, he ingratiates himself with the citizens, becoming one himself. Then he mantles their most divine mortal, Arden Sul. Then he moves on to mantling Sheogorath himself. Each stop along the journey, the CoC does something or makes something symbolic. As I already said, symbols are important to TES. Unless all of the symbols and back-story were a complete figment of the CoC's imagination, using all of those symbols (including forging a staff of Sheogorath's divine essence) has got to do something in that world. After all, all it took to become an aspect of Shor was to follow the pilgrim's path, be touched by Pelinal, and then assemble Pelinal's armor. Of course, along the way for the CoC to become Sheogorath, he has to perform increasingly insane acts including facing down a Daedric Prince in singular combat, fighting (and killing) his self, and lighting himself on fire.
As I already said, by the end of the SI MQ, the CoC is bat[censored] insane, and it was all thanks to Sheogorath. However, and this is where my theory relies on one's conviction in the theory, how can the CoC pretend to mantle Sheogorath? Either you do or you don't. Either you believe you mantled him or you didn't. If you believe that you have become a god, and if everyone around you (imaginary or not) also believes that you have become a god, then what's stopping you from becoming a god?
For those of you who are thinking "this is really long," read the paragraph right above this one and you'll get the gist of what I'm saying.