The two central figures in Cervantes's novel are Don Quixote and his squire, Sancho Panza. The pairing of a hero with a sidekick, or two complementary comic or semi-comic characters, is a recurrent theme in literature and drama. Laurel and Hardy are a more modern example of this tradition. However, Cervantes gives his main characters distinct personalities, making them both instantly recognizable and multifaceted. Many scholars regard Don Quixote as the first detailed character study typical of the modern novel.

The fundamental relationship between Don Quixote and Sancho Panza is that of master to servant, landowner to peasant. Due to his wealth and education, Don Quixote is expected to dominate the relationship, but the quick-witted Sancho often shows superior intelligence. This dynamic may explain their tumultuous relationship. Don Quixote frequently becomes so angry with Sancho that he shouts at him and treats him poorly; at times, Sancho embarrasses his master, and once, Don Quixote even abandons him in a perilous situation. Initially, Sancho accompanies Don Quixote with the expectation of financial gain and because he prefers the adventurous life over the monotony of home. Soon, he realizes that Don Quixote's mind is troubled and begins to deceive and ridicule him. There are moments when Sancho gets so disillusioned that he nearly leaves Don Quixote. Cervantes uses this to illustrate the fluctuating nature of even the closest human relationships.

At the novel's outset, Cervantes portrays Don Quixote as a madman with occasional moments of clarity. During these lucid intervals, Don Quixote exhibits the values typical of an early seventeenth-century Spanish gentleman. However, most of the time, he is consumed by absurd delusions. For example, when he encounters a villager wearing a brass basin on his head to protect himself from the rain, Don Quixote insists that the basin is the enchanted helmet of the Moorish King Mambrino, captured by Rinaldo in the literary work Orlando Furioso. Sancho, with his more pragmatic view, insists on calling the headgear a barber's basin. These differences in perception between Sancho and Don Quixote drive much of the novel's action.

The entire novel revolves around the contrast between what Don Quixote perceives and what Sancho Panza sees or fails to see. While Sancho sees an inn, Don Quixote sees a palace; Sancho sees windmills, but Don Quixote sees giants; where Sancho sees a flock of sheep, Don Quixote sees two warring armies. Don Quixote strives to bring back the chivalric order by revealing the romantic potential hidden within everyday reality and making it visible to others. Together, Don Quixote and Sancho Panza represent different perspectives on the world: the idealistic versus the realistic, the foolish versus the practical, the ascetic versus the worldly.

The irony of Don Quixote's quest becomes evident as he seeks Dulcinea del Toboso, a woman who exists more in his imagination than in reality. Sancho fabricates Dulcinea and tries to deceive his master into believing he will encounter the lady of his dreams. In the novel's second part, Sancho presents his master not with Lady Dulcinea but with three unattractive peasant girls, describing them in the grandiose language of romances. However, Don Quixote sees the girls for what they truly are. Until now, it has been Don Quixote who, upon encountering ordinary things, spontaneously transforms them into elements of chivalry, while Sancho often attempts to counter his master's absurdities.

Now, Sancho improvises a scene following the criteria of chivalric romances, while Don Quixote's illusion shatters when faced with the crude reality of the peasant women. Thus, Sancho begins to embrace the world of knightly adventure, while Don Quixote becomes increasingly sane, eventually reverting to Alonso Quixano the Good by the novel's end. The squire's shift from reality to illusion intersects with the knight's journey from illusion to reality. By the conclusion of the novel, Don Quixote and Sancho seem to have nearly exchanged roles. This transition has led some critics to speak of the "Quixotification" of Sancho and the "Sanchification" of Don Quixote.

Cervantes's intriguing exploration of the boundary between madness and sanity, ideals and reality, addresses key themes such as the legitimacy of modeling one's everyday life on literature; the subjective nature of reality and the unreliability of human perception; and the ways in which literary ideals shape the courses of real lives.