Much of Kikyou's life was defined by the Shikon no Tama. It her life's duty to protect it, she met Inuyasha because of it, she died because Naraku wanted it, and she was resurrected because Urasue wanted to use her to find it. Of course, Kikyou's life wasn't the first one to be ruined by the jewel. The tragedy of the sacred jewel began many years before with another priestess and her battle against an army of demons.
Hundreds of years ago, war and famine reigned over the land, leaving many dead and dying. Demons could feed endlessly on the dead and they grew in number and power, making a bad situation even worse. Humans with power rose against the mighty demons and the strongest among them was a priestess named Midoriko. She was powerful enough to purify the souls of the demons, stripping them of their power.
Everything is made up of the Four Souls--Aramitama, Nigimitama, Kushimitama, and Sakimitama (spellings are from
InuSEC), or courage, friendship, wisdom, and love. When the four souls work properly in harmony, it is called Naobi and the human heart is filled with good, but if a person chooses to do bad, the four souls "energize evil." Basically, anything, demon, human, or otherwise can be either good or evil. Basically, Midoriko was able to use this fact to purify and destroy demons.
In a great battle, Midoriko was surrounded by countless demons when one of them was able to bite into her flesh. She used the last of her power to take the demon's soul, pulled it in with her own, and forced it out of her body, leaving a large gash in her chest. The result was the Shikon no Tama--a jewel containing the four souls with the spirit of Midoriko and the spirit of the demon fighting a never ending battle of good versus evil. The scene of their battle was frozen in stone, the bodies of the demons and the priestess covered in stalagmite after hundreds of years.
The jewel passed from owner to owner, until it returned to a village of youkai exterminators near its birth place. The youkai exterminators (Sango's people) could fight the demons who came to steal the jewel, but they could contain the evil within it. They decided to put it in the care of someone who would be able to both protect and contain the jewel. Kikyou was selected as the strongest priestess and given the honor of being its protector.
In the manga, there is a slight difference. Midoriko fell in love with a man, much like Kikyou. Demons, wanting to destroy such a terrible threat, took possession of the lover and attacked Midoriko. Surprised, she was unable to defend herself and the demons overpowered her, but with her remaining strength, she pulled the demons' souls and her own together and formed the Shikon no Tama. It is rather sad that a person's love for another is considered a weakness for both Midoriko and Kikyou.
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