On walking: it was really important for me to walk underground as a way of setting mood, versus running overground... but people do seem to have responded negatively to that...
On night/daytime: there are different story aspects accesible by day and by night
on the second island, the wild island
; otherwise, it was an experiment in trying two different ways of placing enemies and detailing some minor aspects in the atmosphere. There's no clear cut division to either, I sort of wanted it to be a "hey, do it this way, do it that way, try again, please yourself!" mechanic. Also, you can go from one to the other, as pie_sniper pointed out, by sleeping at the corner with the "observation" sign!
On difficulty/design: yeah, there's issues there, since the game accidentally ended up as a challenge one and I didn't really have a clue how to pull one off... the bit you mention about blue/grey squares is really useful and something I hadn't realized!... I think there's aspects of gameplay that needed to be streamlined and I do wish it was an easier level... I did change it after beta testing to be lighter, but still