In Okami, there are different legends. This is a guide so you can understand the legends if you have not played Okami or watched the Let's Plays. This is basically a story guide.

NAGI AND OROCHI

200 years ago, when Orochi(the 8-headed dragon demon) began its reign, a white wolf was seen roaming around the village at nights of the Kamiki Festival. The villagers, thinking that the wolf was a familiar of Orochi, named her "Shiranui". Because of this, Nagi attempted to challenge her, but the wolf was able to dodge Nagi with her swift movements. On the night of the festival, when it was discovered that Nagi's wife, Nami, was to be sacrificed to Orochi, Nagi disguised himself as Nami to gain access to the Moon Cave and attempt to slay Orochi. However, his attempts seemed to be in vain because of Orochi's steel-hard hide. During their battle, Nagi was brutally injured. Just before the fatal blow was about to be done to Nagi, Shiranui(Who was actually Amaterasu) arrived and stepped in to battle Orochi. 

After hours of fighting, Shiranui received many wounds and was about to lose the battle. When the final blow was to be struck, Shiranui howled, summoning the moon, which gave Nagi new strength that helped him defeat and seal Orochi. Even though Nagi had won the battle, it came at a price. Shiranui had been poisoned by Orochi's deadly fangs during the battle and was slowly, but surely, dying. Nagi carried Shiranui back to the village where she quietly died. The villagers built a shrine on her resting grounds to honor her for her brave deeds. 

WAKA

Many years ago, a mysterious catastrophe wiped out all life forms on the moon. Only three members escaped, one of them was a man called Waka. He boarded the Ark of Yamato, escaping the lunar realm and reached the Celestial Plain. There, the Celestials and the Celestial Brush Gods accepted him and he resided at the plain for an untold time.

However, one day, disaster struck. Orochi and its legion of demons suddenly came flying across the sea of stars and assaulted the Celestial Plain. Amaterasu and Waka faced the demon together, but their efforts were fruitless, and Waka gave the prophecy "Only the chosen one can defeat Orochi". Following this, Amaterasu dragged the beast down to the mortal realm, and the legend of Orochi began. Waka then evacuated the Celestials into the Ark of Yamato, trying to flee from the destruction of their home. However, not long after setting sail, an endless legion of demons rose from the Ark's depths; they massacred and devoured all the Celestials. The Ark lost its rudder, and plummeted down to Laochi Lake, releasing the demons. After the tragic event, Waka came hiding in Nippon, apparently from the searching of the demonic legion.

OROCHI, THE 8-HEADED DRAGON

Orochi presumably originated from the Ark of Yamato. More than 200 years prior to the events of Okami, it attacked the Celestial Plain. Following the advice of Waka, Amaterasu dragged Orochi down to the mortal realm, waiting for a person of a legendary bloodline who could defeat Orochi. Orochi settled in the Moon Cave and terrorized the inhabitants of Kamiki Village, selecting a young maiden as a sacrifice every year. Amaterasu was wrongly believed to be Orochi's familiar and was given the name of "Shiranui". Eventually the person of a legendary bloodline, Nagi, was born. Although he antagonized Amaterasu at first, he teamed up with her to defeat Orochi after his wife, Nami, was chosen to be the sacrifice, as the legend says. Shiranui died during the battle(although it was later revealed by Amaterasu after her journey through the Spirit Gate that many details of the legend were untrue and that Shiranui actually died of wounds inflicted by Lechku and Nechku during the battle atop Wawku Shrine; during the fight with Orochi, the goddess was already on the verge of death).

A century later, Orochi returned after Nagi's descendant, Susano, accidentally removed the sword Tsukuyomi that was binding it. However, Orochi was not at his full power, and needed a blood pact with Susano in order to regain his former strength. Orochi also consumed Tsukuyomi to prevent anyone from sealing him again. Although Orochi tried to convince Susano to submit to him, Susano's courage and determination shone through, and he and Amaterasu defeated the beast.