Which factors govern the evolution of mutation rates and emergence of species? Here, we address this question by using a first principles model of life where population dynamics of asexual organisms is coupled to molecular properties and interactions of proteins encoded in their genomes. Simulating evolution of populations, we found that fitness increases in punctuated steps via epistatic events, leading to formation of stable and functionally interacting proteins. At low mutation rates, species form populations of organisms tightly localized in sequence space, whereas at higher mutation rates, species are lost without an apparent loss of fitness. However, when mutation rate was a selectable trait, the population initially maintained high m...