Dragons certainly exist. They live in books and reproduce when someone reads a book about dragons and is inspired by it. Over time evolutionary pressures have caused the more successful of the younger dragons to become cuter and more friendly, and the most successful dragons even made the leap to film. That's how Toothless from How To Train Your Dragon came to be. He is the result of a long process of evolution of dragons. You can trace his lineage from the Beowulf dragon, to Tolkein's Smaug, through Eragon's Saphira, to the Toothless of the HTTYD books, and finally to Dreamworks' movie version. Each generation trying out new evolutionary adaptations that changed their fitness to survive and reproduce, and the niche they occupy within the ecosystem that is human thought. Toothless is the culmination of those thousands of years of evolution, purpose built to fill children's heads up with wonderful dreams.