Fantasy is, to put it frankly, one of the most fascinating, and most difficult genres at the same time. On the one hand there is a tendency for it to be highly derivative. In fact, the entire genre is derivative, and not just because of Tolkien. Tolkien himself was not an entirely original writer. His world was a product of his education. Fantasy writers, therefore, have been using mythology and history to write some of the fantastic stories we all have come to love and enjoy. On the other hand, however, fantasy also has the tendency to push the boundaries of reality, which can, and is, a problem.
Fantasy must, as a rule, be more realistic and believable than any regular fiction story or a science fiction story, barring once again historical texts and the like which are, hopefully, real anyway. This is true because, while fantasy is filled with magic, kingdoms, prophecies, kings, soldiers, and a million other commonly 'medieval' ideas, it must present these ideas so that the reader can accept them as being realistic in the context of the world presented. While Tolkien may be a poor example in this post, he is, interestingly enough, the most recognized example. When you read Tolkien you are not suddenly encumbered with magic toting wizards that seemingly throw magic around the same as a non-environmentally conscious human being tosses trash on the side of the highway. Gandalf and Saruman both are powerful wizards, yet their magic is used sparingly. We're led to believe, then, that magic is not something available in vast, unrestrained quantities, and one cannot simply do magic without extensive knowledge, something which both Gandalf and Saruman have plenty of. Perhaps Tolkien is an example of 'high fantasy' rather than an example of fantasy in general, but in the case of fantasy that is intentionally serious, it is clear that magic must have a reason to exist and be balanced. Unless your entire world is built on magic, and therefore everyone uses magic, the magic in a fantasy world must be believable. We can't think that a knight would have any chance alone against a sorcerer with unimaginable power that seems to be endless and easy for the sorcerer to use.
Of course, this doesn't apply to all fantasy. In the case of fantasy that is intentionally humorous, magic may or may not have a need for balance. We might call these types of stories 'fairy tales' for adults. An example might be Stardust by Neal Gaimen. For any that have the read the book you'll have to excuse me. I am basing this on seeing the movie. However, the magic in Stardust, while with limits, is not necessarily balanced in any traditional sense. Presumably, if the witches manage to get hold of a star, they will be granted youth and amazing power, power which seems to be very hard to counteract without other magic involved. But it doesn't matter. In context of the story, things don't have to seem entirely real because that's not what the story needs to exist. Stardust is a love story with a fantasy twist.
Magic, therefore, has two purposes--realism and entertainment. Still, since the majority of fantasy happens to be of a serious nature, I will only address magic in context of seriousness. In serious stories, as I've mentioned, magic must make sense. It must be real and believable. If every character can summon the almighty evil monster from the depths, then there is almost no purpose for magic to exist. Magic must have a reason to exist, otherwise it becomes like technologies that we no longer find of use today. We all rarely, if ever, use typewriters since our computers now can do the same thing, but with more functionality.
Now that magic seems to have been address, I'll have to divert my attention elsewhere. Another feature of fantasy that must be taken seriously is race creation. This refers to any sort of creatures you might create, or have been created previously. We have all heard of elves, dwarves, and the myriad of other fantasy races that have already been done before. For that reason, I see no reason to address them since it is apparent that they are all relatively accepted as believable creations anyway. However, I will address creature creation in general. Because a fantasy story deals exclusively with things that do not exist in our world, and couldn't exist in our world--which takes care of science fiction being included here--it is apparent that whatever you or someone else creates must have a purpose, much as magic has a purpose. If you create a creature that has an arm come out of its head, that arm better have a reason to exist. It would be unbelievable to have such a creature, which we will call a Grabber, if it could not use all of its limbs. Our Grabber, therefore, has to use that limb. In this example, which I have made up because I felt like it, we can assume that the Grabber has that arm because there is a hand attached to it that it uses, much like an elephant, to acquire and place food into its mouth. By making that clear, the third arm has a legitimate function, and the problem of unbelievability is solved.
However, things can get very sticky even if your creature's extra limbs or abnormalities--from a human perspective--have a purpose. If your Grabber had sixteen extra arms on its head--a head that must be quite large to contain so many limbs--and each has a purpose--which I am in a state of confusion about because it is hard to fathom what someone could do with two extra arms, let alone sixteen--it is going to hinge on the absurd. In humorous fantasy it wouldn't matter, because such a creature would be seen as interesting and funny anyway. However, in this serious case, those extra arms are going to seem quite ridiculous. How could such a creature exist? How could it possibly be even remotely intelligent? It would have to be an insect wouldn't it? These are the sorts of questions that will be asked by the reader, whether they know it or not. Creatures have to be real. A dragon comes off as real not because of the wide range of myths that have captivated our civilization, but because when it is described, we often have a clear image in our heads and it simply makes sense.
Other aspects of fantasy that must be realistic are a little more complex and are often ignored items in fantasy designed for adults. The problem of population comes to mind. How does one populate a fantasy world realistically? Presumably, all fantasy worlds are mock representations of medieval Europe, or perhaps Asia. Given that, there are many websites and books that have already presented the information about the world in those times that deals with population and politics. If you have created a world that is small, and there are very few cities, but you have a war where millions of soldiers show up from the same place, it is going to be hard for anyone to believe. Medieval cities were rarely more than a few hundred thousand people. When I say rarely, I mean rarely. Yes, there have been medieval cities with millions, but for the most part, cities were small by modern comparison. If you have three cities in your kingdom, and each is, for an argument, a million people in size, that still does not make sense in context of the story. Most people in a medieval society are not soldiers, but laborers, farmers, and the like. So, you have to be prepared to explain this to the audience, otherwise it won't make sense.
Or another issue might be the landscape in general, in relation to population. Perhaps you have a world where a huge society of hunters lives that happens to be exceedingly cold--much like the last ice-age, or close enough. The thing is, in a climate like that, large societies would be nearly impossible. For an example, research some of the Native American tribes who lived in the California Sierra mountains, or other cold and resource-lacking locations.
To put this all simply, fantasy must be realistic. A reader cannot be expected to dispel all disbelief. There are some things that we all can look at and go "that doesn't make sense". For that reason, fantasy writers have a harder job that most anyone else. They are forced to write what isn't real and never will be real, and in the process they have to present it in a way that will captivate the reader, not turn the reader away.
What do you think are some other things about fantasy that must be realistic?