Spirits and Small Gods

The Heavens are real, and they punish cultivators who attempt to defy the natural way of things. So the existence of the heavenly courts and gods above is not in question. But they are not something that people can believe in. Praying to them will not change their actions in regard to you. They are too high up for that, and cultivators simply learn to work within their constraints. However this does leave room for superstition and belief in other things. And that niche has been taken up by the spirits of the world.
When a spirit acts in a certain way it can get people to believe in it. Perhaps a spirit helps children who fall into a certain pond, and drowns wicked passerby. Perhaps a spirit kills anyone who enters a local grove. The morality of the actions doesn't matter as long as the spirit is consistent. These traits become the spirit's Virtues and they become engraved in the beliefs of the local populace. This is how a spirit becomes a god. A small god.
The path to godhood is separate from cultivation, though it does have similarities. It is based entirely on the number of worshipers a spirit has. There is no tribulation or cultivation. The spirit simply becomes stronger as it amasses belief. And by the same measure it can become weaker if it loses followers. However as long as it has that power the spirit can use its Virtue to strengthen itself, bless its believes, and control its domain. A spirit's followers are counted in mortal believers. It is possible for cultivators to worship a spirit, and their stronger souls provide more weight of belief, but because they themselves are more powerful they have trouble accepting a weak spirit as a god. Demon beasts can also generate belief, but this is much rarer as by the time they become intelligent enough to worship something they are already quite strong.
It is mostly spirits who benefit from this process. Their ephemeral nature works best for generating believe, as when a human cannot see something it is easy to attribute anything and everything mysterious in the local area to their actions. However it isn't impossible for a human cultivator or demon beast to accumulate Virtues. A wandering hero might have shrines set up to them by villagers they save. Or a barbarian war chief might be given offerings to ward off their wrath. Typically this doesn't amount to much. A small amount of Virtue might make them slightly stronger, but is negligible compared to their inherent strength. However after they die their Virtues will often combine with their remnant souls to produce a spirit that steps directly onto the path of godhood. This also somewhat benefits the ghosts of people who practice ancestor worship.
Local Spirit (100 Believers)
A village or collection of villages might worship the local spirit of a hill or lake or woods. This spirit can take their location as their domain and enact small changes there such as ensuring the water is always clean or the trees regrow rapidly. Local spirits can be casually destroyed by masters or even warriors and the worst they will face is the wrath of the local villagers. It is at this point that evil spirits usually die as wandering exorcists taking care of them receive the villagers gratitude instead.
Valley Spirit (10,000 Believers)
A spirit that has accumulated the belief of quite a few villages or even a large town can spread its domain much wider. They can provide minor blessings to their followers that aid them in their tasks and enact broader changes in their domain. A county spirit could probably resist a Grandmaster especially if it's followers were actively bolstering it's virtue.
Country Spirit (1,000,000 Believers)
A spirit whose followers have grown throughout several cities will become a real force. Their domain can cover an entire kingdom and their will can enact even large changes such as creating new mines or blessing the strength of entire armies. A country spirit is a useful thing for a kingdom and a wise monarch will give them offerings to ensure they stay benevolent.
Small God (100,000,000 Believers)
When a spirit gains the belief of a large kingdom they undergo a qualitative change. Their domain does not grow, but it solidifies. They can now enact sweeping changes such as raising mountains or carving out lakes. Their priests become enshrouded in their power providing healing, enhanced defense, and blessings when they follow the god's virtues. Even cultivators see the benefit of following such a god, but it is a long hard struggle to reach this point and as such few spirits reach even the small god stage.
Large God (10,000,000,000 Believers)
If a god can cultivate the belief of a large empire it can extend its domain once again to cover this vast stretch of land. Such a god can change the natural laws inside its domain, and change the lives of multitudes with a mere thought. It's priests become so charged with power that they can contend with even top level cultivators no matter their own cultivation base. Few dare challenge such a god, and there are rumors that only one currently exists. Sotash, the god of Implacable Justice worshiped by the Sotash Theocractic League located in the vast mountains and plains of the continent of Xoslora.
Deity (1,000,000,000,000 Believers)
When a god's religion grows so vast that their believers cover most of the world, then they a path to the heavens opens up for them. They have become so ingrained in the beliefs and folktales of the people that a place for them is carved out in the Jade Emperor's courts. They no longer enact changes in the laws of the world for they are the laws of the world.