Not everything is a gem! The people in the town are all normal humans as far as I can tell. They're the natives. But yes, there are a lot of gems around.

Um... and when people get hurt really badly they... poof?

[She makes a small motion with her hands, like a very tiny explosion.]

So everything but the gem vanishes. I guess it's like... they retreat into their gem so that they can get better? And then their body reforms around the gem. So that is what happens to the monsters. They are just hiding in there, but they can't get out unless the bubble is popped.