So a village started worshipping a god a long time ago, using the god's power to assassinate people in exchange for sacrifices. At some point, or maybe over time, it preyed on them as well, until eventually it was perpetuating the illusion of a village, made out of snow. Even the illusory villagers believe they are real. And interestingly, it didn't actually control its illusions. They worshipped the god because they chose to for the benefits. We know it doesn't control them because the girl actively works against it, and her father did as well and was killed by the villagers for it. I don't even think it can selectively kill one of them, or else it wouldn't keep the unruly ones around. They appear to be able to have kids and age and die normally. So maybe illusion isn't the right word for it. They are real people made of snow, kept real by the god's power.