I think nitrogen also dissolves in small quantities into the blood, which is why we have to pee; the yellow in the urine is actually a nitrogen compound.
Urea? That's formed by the liver metabolising ammonia, itself the by-product of amino-acid/protein processing.
Nitrogen in the blood is something you mostly hear of in the context of "the bends", where high pressures cause an unusual diffusion and dissolving of nitrogen across the lung manifold, if a standard atmospheric composition is maintained for that high pressure (the common replacement, helium, migrates quicker still but also more readily migrates back as pressures decrease, reducing - but not removing - the possibility of coming out of solution
within the blood vessels and other tissues). It tends not to happen (certainly as significant precursor to the urea process) under normal conditions. Nitrogen-fixing biologies (commonly seen in the vital element of crop-rotation) or chemistry (the Haber process, towards making fertilising compounds) take the largely inert atmospheric N
2 and convert it into the active nitrogenous compounds that build up our food plants, our food's food plants, etc, to be consumed as proteins/etc.
A particular test for lung function is the Nitrogen Wash method. Giving pure oxygen breaths to someone and then measuring the proportion of nitrogen that appears when deeply exhaling (compared to that expected from normal composition) indicates the amount of 'dead air' contained within sub-par lungs. This only works because there's no significant migration of nitrogen either way across the pulmonary membrane compared to the transposition of the oxygen and the carbon dioxide.
That's from some A-Level (secondary education) Biology/Chemistry, and perhaps some later intellectual osmosis, so may not be as comprehensive a description as it could be from a proper medically-trained person, but nothing I've just skimmed to check seems to suggest I'm too far off reality.
Anyway, how have Dwarves started smoking, without there being any Hobbits to introduce them to it?