Dwarves were created when the two first sentient races, Phoenixes and Dragons, would not listen to the Elves, and requested Vacadrews give them a way to make weapons to force the two to listen. This lead to Vacadrews created the Dwarves to make weapons for the Elves. Unfortunately, the two began waring with each other instead.
A small tribe of Elves and small tribe of Dwarves, formed a village and when the two reproduced together, this created the first ever Humans. Unfotunately, while Humans can reproduce at a rapid pace amongst each other, Elves and Dwarves do not reproduce as quickly, in spite having longer life spans. Eventually, they were outnumbered.
When Salliel was split into Alliel (Earth 1) and Saecriel (Earth 2), Elves and Dwarves all remained on Alliel, but for the most part went into hiding and have remained hidden from the majority of the world for centuries.