Imaro
Legend
The latter, where 'PC' status has no meaning, is not to me an extreme at all. In fact, it's my default - inhabitants of the game world don't go around with little 'PC' or 'NPC' stickers on their foreheads and nor should they. The PCs, if they're going to stand out at all, do so because of their deeds (for better or worse), not their special-snowflakiness. There's a mechanical difference between special characters and commoners, but by no means are all special characters PCs: nobility, NPC adventurers, just about anyone with class levels - all these count as specials, along with the PCs.
The way I see it, the random blacksmith you meet in town today could end up being your PC next year when you need a replacement and you roll 'blacksmith' as her secondary skill.
Lan-"has anyone ever had the cojones to name their character 'Snowflake'?"-efan
I would assume in this is type of play... well you wouldn't be worried about balancing encounters around PC level... would you? Doesn't that make them "special snowflakes"? If not well then this all becomes moot for a game like yours.
EDIT: To further expound... I have run sandboxes where the PC's aren't special but then I designed the world and they had at it... I didn't concern myself with balancing their encounters around the expected encounter assumptions at their level... the whole point would be that they explore as they want to.