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This is because of the strain of realism throughout the novel which continually debunks the title character's fantasies and exaggerated love for adventure, which is typical of the older prose form known as the romance. (Think, for example, of the medieval Arthurian romances dealing with knights, beautiful ladies and great battles and monsters and so on.) Sancho Panza, Don Quixote's companion, is the embodiment of this strain of realism.
When the novel first developed as a distinct prose form about four hundred years ago it laid a new stress on everyday events and characters which has generally persisted to this day. Don Quixote was enormously influential throughout European literature in this shift towards realistic prose narratives.
Before Cervantes' time, books weren't written like they are now. The idea of a long, fictional narrative was basically non-existent back then. Books were mainly written as historical narratives, philosophical treatises, scientific works, plays, or epic poems. The closest thing to a "novel" would have been something like the Iliad, or the Odyssey, or the Divine Comedy. But each of those was written in verse. Then along comes Don Quixote, which looks a lot like the fiction of Homer or Dante, but written in PROSE (non-verse). Don Quixote is considered the first modern novel because it was one of the first to contain a fictional narrative, written in prose.
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