|Found this in a Google Image Search for "realistic fantasy".|
Anyway, I am not really going to deal with the question as it applies to medieval-style fantasy. My current idea is a semi-gonzo science-fantasy setting, which has an entirely different set of assumptions. Rather than trying to refit a medieval setting to accommodate dragons and orcs, I would do better to think about what influences from such creatures the peoples of the world would need to adapt to. What we are looking for isn't exactly "realism", though, we want a self-consistency, where the consequences of an assumption are played out in the setting.
Let's start with dragons. I do want to have something like dragons in the setting, but I want them to be more alien than the basic idea, as my idea is that they are, in the setting, extraterrestrial in origin. I've always thought that the "blue" dragons of (A)D&D were the weirdest, with their lightning breath weapon. The rest of the dragons, for the most part, have breath weapons that consist of forces that would be known and understood by medieval peasants (fire, "bad air", and such), but lightning was seen as a particularly divine trait, unrelated to anything that existed in the world. So, I will have dragons, but they will have the lightning breath weapon of the blue type of dragon. Um, but more hit dice, because dragons should be tough.
What would be the response to a flying lightning-generator (as well as other flying combatants, such as levitating airships)? You'd need a fortress that protected against attacks from above. Perhaps an underground bunker. A series of tunnels and rooms dug into the ground, one might say. It's always good to have another rationale behind dungeons. To make these underground fortresses plausible, we'd need to have some way to make mining a little easier. Perhaps the world will have a couple of genetically-engineered races that are better at mining than baseline humans. Now we have dwarves (and perhaps some other races like gnomes, as alternative, less successful designs from the ancient genetic engineers - the goblin races, in my conception, are alien beings come to the Last Continent).
Anyway, this is just one way in which thinking about the different assumptions of the setting can increase verisimilitude and also imply new things about the setting. Another time, I'll discuss why I think that achieving verisimilitude in games, at least ones that tend toward a "sandbox" style of play, is important.