Back before the advent of the lands, the gods were in wanting of beauty. So they created a lesser being called Dwarf to craft them things of beauty. Their bodies were formed of rock, their blood magma. After the first day, the gods came down to these beings and asked for what he worked on.
"But I have nothing to craft into things of beauty." Dwarf complained, for he had made nothing. So the gods set down plains, oceans and forests. Any metal and mineral Dwarf wanted was there, ready to be picked. With this dwarf began furiously working his craft. Several-thousand years of this would pass, and the gods would have many objects of beauty.
However, these objects would be the undoing of the wicked ones. Some of the gods would become jealous of the crafts other gods had, and thus started wars in the heavens. They started to create their own crafters, known as Elf and Human. But neither could match the skill of Dwarf. Some gods even wanted the death of Dwarf in their blind jealousy, so they created Goblin and Kobold to kill Dwarf and steal his treasures. As a final act of their wickedness, they collected all of the metals and minerals of note from the land and sealed them deep underground, diluting them with the rock.
The gods were appalled by these actions. So they struck down these wicked gods, and where their bodies fell onto the land great mountains were made to seal them away from the hands of Dwarf, for the body of a god, even a wicked one, is too great a material for a non-celestial being.
But the rock of the land was softer than the rock of Dwarf, and it was trivial for him to reach the bodies of the fallen gods and create crafts from them. This was the greatest sin in the eyes of the gods, as it was the very thing the fallen ones would do. So they took away the rock of Dwarf, replacing it with skin. They took away the blood of magma, replacing it with blood. Both were taken into the mountains and used to guard the bodies of the fallen ones.
Dwarf had an unrelenting urge to craft everything into works of beauty. But Dwarf knew alone without his old blood and skin he would not be able to reach the metals beneath the land. So he took some of the body of a god which he had hid from the others and made a female, from which children could be made. In an act of defiance to those that took away his ability to craft, he made similar such females for Human, Elf, Goblin and Kobold kind.
Humans accepted this gift, but were still fearful of the gods. So they vowed to stay away from the accursed mountains. The Female of the elves was made from the body of the very god that made them, so they formed their belief system behind the idea that such actions are okay and fled to the forests, where the trees could hide their shame. Goblin were created to kill, but he formed a sort of friendship with Dwarf. He decided to join Dwarf in his quest to craft things of beauty. Kobold was a quickly-made thing, resembling an animal of low craftgodship. Dwarf tried his best to make the future generations of Kobold into something like his crafts, but he could not fix them. Instead Kobold felt a great attraction to other such creations, to the crafts of not only Dwarf, but human, Elf and Goblin crafts.
After seeing these actions, the gods again made these Females into flesh. But dwarf knew they would do this. He had hid some of the body of the god away, to be added after the gods had done their punishment and could touch them no longer. The last part of the body of the god was it's hair, which was more that Dwarf could fit on his head. So he put it on his face.
After that, many tales had happened. From the goblins getting too greedy and being corrupted into atacking their friends, the Dwarves to Elves feeling the trees they hid beneath were more valuable than the other races. However, such stories are for another time.