You can't finish Dark Souls without doing a bunch of speculation. About souls. Here's mine!
What We Know
Firstly, the definite stuff, things that are stated explicitly in narration and descriptions. Some of it is obscure, depending on what path you take through the game, but it's as True as anything gets in Dark Souls lore.
Before the First Flame, there was basically nothing but trees - specifically, even Light and Dark did not exist (nor Life and Death). This, we can infer, sucked, except for dragons - people were either zombie protohumanoids or just didn't exist at all. Then came Fire, and Disparity, and within the fire were found four souls... I'm going to call them the Dark Soul, the Sunlight Soul, the Chaos Soul and the Death Soul. Although Chaos might be better named "Life", or Death "Occult" in game terminology. The four beings who found these souls became Lords.
The souls are all depicted in-game as flames, pieces of the Fire- this applies to the Pygmy's Dark Soul, too. But, they have differences - 'alignments' or powers. Darkstalker Kaathe claims that the Dark Soul is unique; more on that later, but each of the souls definitely has aspects which differ from the others. They each have their own aligned sorceries - the ancient 'fire sorcery' of Izalith that predated pyromancy; 'dark sorceries' from the abyss which relate to the dark soul, humanity; standard sorcery is probably Light aligned, as most of the magic in the world is.
The souls in game are actually quite clearly separated by their literal appearance. Most of the 'boss souls' are white- and if you read the descriptions, it becomes clear that these were all things created directly by the 'gods' - the light-soul people. There are just two exceptions. The Sanctuary Guardian, which is claimed to be a demon - Chaos/Life aligned! - is yellow. Manus' soul, which is just (like other human souls) humanity, is black. Unfortunately Pinwheel doesn't drop a soul, or we might have got to see if the Death/Order ones are different too...
What I Think
This is more interpretive. It's a well-supported reading of the text, I think, but others are possible. On Light: Gwyn's soul was either the most powerful or he just used it best. He shaped most of what the world is, set up religions and divided his soul again and again, giving parts of it out to the favoured. This might be how all the other 'gods' came to be, but it's not clear. The children, for example - Gwynevere and Gwyndolin and so on - they might simply have been born with their own souls, rather than explicitly granted shards of the Light soul. Humanity, then, might be analogous- a human's 'humanity' is to a god-child's 'soul'.
In fact, humanity is just one of several humanoid races. Presumably they were all one, before the Lords, but 'humans' are definitionally creatures of the dark soul. The 'knights' and I think 'gods' of Anor Londo are their equivalents in light, the witch's daughters & followers in life. Ciaran refers to "you humans", despite being basically human in size and ability - other anorlondians are sometimes huge, literally towering in stature.
Humanity is where this gets really interesting. Humanity is either the literal dark soul fragmented, or 'aligned' with it in the same way that the moonlight butterfly soul is 'aligned' with Light (having been created by Seath). I tend to the latter idea- it makes sense of Manus and it's more consistent with everything else... except Kaathe. Kaathe claims that the dark soul is unique, that it is particularly distinct from the other lord souls, that it will outlive the Fire, and that it should be put out forever, to usher in the 'Age of Dark, which is the Age of Man'.
How credible is that, exactly? Stepping back into the realm of fact for a moment: Darkstalker Kaathe deceives humans into massacre and calamity, professionally. He's explicitly responsible for the corpse piles of New Londo, and for the Darkwraiths which torment all the actual players of Dark Souls. "A serpent" also tricked the people of Oolacile into disturbing Manus' grave and creating the abyssal eruption in their time - the inference is that it was Kaathe again, though it could certainly be one of the others. Frampt lies, too- at minimum by omission. In the 'dark lord' ending he's just as happy to serve you as Kaathe is, despite not having mentioned a word of it...
In short, I believe that Kaathe is lying in whole or in part. Frankly, most of the NPCs in this game are lying or deluded, so we have to pick and choose what to trust. I certainly believe that the pygmy found the dark soul, but that he "waited for Fire to subside"? Why, exactly? Before Fire, there was no light OR dark. There were just huge trees and shitty dragons. He goes on to claim that Gwyn, in his selfishness... sacrificed himself. It simply doesn't make sense.
Finally, we know from the rings that serpents are "imperfect dragons".. who certainly wouldn't have much incentive to side with humanity, given what it's done to their kind.
What I Guess
Here's where it turns into speculation - still a supported reading, I hope, but From deliberately wrote the game to be ambiguous in this respect, so support exists for interpreting either of the endings as good/bad. There likely isn't a definitive answer even if a poll was taken of the dev team. Given the choice of linking the fire or letting it go from cinder to ash, all we actually know is that fire brought about the current age, that it wrought light and dark and life and death, that it's necessary for civilisation in its current form. Gwyn, whether benevolent or not, has failed - he's burned out, gone hollow.
There is hope, however. Lord Gwyn did something stupid: he gave most of his power away. He went in there, according to another item description, with basically the sword on his back and his will. He became fuel for the Fire, and rekindled it for a while - the timeline is confused but it was probably either 200 or 1000 years. ("A couple of centuries" ago is when Quelana says the Witch of Izalith attempted to recreate the first flame, and it was after she failed that Gwyn linked the fire instead, but, people refer to the black knights wandering for a thousand years).
It didn't last. Can things be different? Yes, they can: the chosen undead has gathered the power of the original Lord Souls, not just a remnant of one. Nito's Death and Izalith's Life and Gwyn's Light and plenty of Humanity. Why else did the Fire go out if not for its fuel being removed? Maybe all they do is burn for a while and keep the world alive - but isn't that enough, when everyone non-insane you meet begs you to succeed?
The gods were abusing their power, for sure. Most of them fled rather than do ANYTHING when things got bad, and Gwyndolin was overseeing the creation(?) of more and more undead, to pour their now-loose Humanity into the bonfires, in lieu of the ember that had been Gwyn. But those are just the failures of Light (perhaps with the assistance of Death) and they're gone now. The nation of Balder, lore tells us, was destroyed- but there are plenty of others out there to rebuild and relearn and, even if your sacrifice is temporary, do what they can to live, in the continued Age of Fire.
