Gaara's life was one of torment and hatred. The sand that protects Gaara is the work of the demon Shukaku. This demon was once the living soul of a Sand priest. Kazekage had the soul imbued into sand, causing the creation of a sand incarnation. This was an embodiment that the Kazekage then had imbued into the being of his unborn son Gaara. Though this incarnation protects Gaara from harm, it has caused him deep emotional and psychological harm. Whenever Gaara sleeps, Shukaku begins to eat more and more away at Gaara's psyche. This has led Gaara to limit his sleep to try and protect whatever mental stability he has left. Seeing that Gaara was unable to control the incarnation when young, Kazekage ordered Gaara killed. The sand constantly protected Gaara though and foiled any attempt at assassination. Gaara has cursed his father and those in the village for what they have done to him but he still acts under their wishes to participate in the Chuunin Exam. It is during this period that Gaara begins to lose more of his mental stability, eventually fully giving himself to the demon and allowing its full large form to take shape, that of a Tanuki, or Raccoon-Dog. It is briefly allowed to run rampant on its own while Gaara engages in a forced sleep, but Naruto is able to wake and injure Gaara and Shukaku crumbled back into sand.
Gaara is possessed by the spirit of Suna no Shukaku, an old sand priest. Shukaku is a tanuki. (raccoon-dog) Shukaku was sealed in a kettle before Gaara's father implant it in him.
Those possessed by the tanuki (raccoon-dog) spirit all suffer from insomnia, and that includes Gaara. This is because the demon within gains more and more control over the host as it sleeps, erasing the real personality and replacing it with the demon's. By staying awake, Gaara manages to remain in control over himself, rather than letting the demon completely take over him. We don't know whether the effect of the demon is irreversible, or if Gaara would return to "normal" should the sand spirit be placed under a seal.

The black lines around Gaara's eyes aren't some elaborate make-up, but signs of insomnia.

Gaara has a jutsu - sleeping tanuki (tanuki neiri) - that allows him to fall asleep during battle and let the demon take control. In Japanese, "tanuki neiri" literally translates into "fall into a tanuki's sleep" or in other words: to feign sleep. The real life tanuki often uses this strategy when surprised.
Gaara became a whole different person by now and he's not the pyscho we know he is anymore.

After being injured Gaara and Naruto are near exhausted, Gaara remained motionless on the ground, only able to watch as Naruto summoned the strength to keep crawling towards Gaara to stop him from further hurting Sakura. Naruto explained to Gaara that he grew up in a similar fashion, that his life could have turned out the same had people not acknowledged and cared for him like Iruka and Naruto's fellow teammates. Naruto explained that one can become truly strong not by fighting for oneself, but for those precious to them. It was then Gaara was able to fully understand that he had been living his life in the wrong manner. Shortly thereafter Kankurou and Temari appeared to help Gaara. Gaara let them know he was finished fighting, and had the team retreat. As they made their way back to the Wind Country, Gaara did something surprising to both Temari and Kankurou, he apologized for hurting them in the past.

After Sand had retreated the country discovered that they had been manipulated into invading Leaf by Orochimaru and not under the direction of their Kage. After conceding defeat, Sand and Leaf became allies again. Months later when Shikamaru and his Genin team went on a mission to retrieve Sasuke from the hands of Orochimaru, Tsunade requested a favor from the Sand Country. When Shikamaru and his team were in a dire situation, the three Sand Genin returned to lend assistance to their allies the Leaf... Gaara came in an