So good. Here's the best way to play (I think).
I love how open this game is, all the little stories you find off to the side, often not explained but obvious from the context. In addition to reading all the books, make sure you talk to everyone until they stop talking back, and use the heart on them till it repeats if you want the full story.
But here's what I suggest - play through once trying to sneak but just killing everyone when you mess up. Get the disappearing bodies skills and just blink, backstab, blink, or headshot with bolts. It'll go fairly fast, because if everyone's dead you can explore pretty quickly.
Now play again - kill nobody, don't get detected (ghosting). By this point your skills are good enough that you can slip through the levels with ease. You think killing every hostile on the level is badass? Having nobody even know you were there is so much more satisfying. And yes, they made it so you can play the entire game without killing anyone. The levels will take longer but you will feel so much more relaxed. You are now the ultimate Zen Assassin. Does a falling victim make a sound if it's not dead?
This game is the Thief 4 I've been waiting for.
P.S: I'm fairly sad that when they playtested the masquerade mission you mention none of the console players could figure it out without explicit directions on what to do, which is why the NPCs in that mission rub things in your face ('HEY MAYBE YOU SHOULD GO UPSTAIRS WINK WINK') even if you're a PC player. Oh well.