1. Origin and prehistoric development

The Dwarves were created by Aulë the Smith, one of the eight great Valar and Lord of all things consisting of rock and metal and all things created. Aulë created his own race, mirroring his own skills and interests, before the Children of Ilúvatar, Elves and Men, awoke in Middle Earth. Ilúvatar blessed the Seven Fathers of the Dwarves with life, but they were brought back to sleep and weren’t to awake before the Elves.

Like all other peoples they too started to journey westwards, and their passing over the Blue Mountains to enter Beleriand marks their entrance in ‘history’: they were incorporated in the chronicles of the Elves.

Well before this time, Durin the Deathless, the most important of the Seven Fathers, founded Khazad-dûm in the Misty Mountains

The Dwarves entered Beleriand in two waves: the first ‘sort’ of Dwarves the Elves encountered were the Petty-dwarves or Noegyth Nibin. They were stunted and unpleasant in character, and appeared to have been banished ‘in ancient days’ from the great eastern Dwarf cities (this most likely being Khazad-dûm).
The last of these Petty-dwarves died in the year 500 of the First Era.

The Petty-dwarves had been persecuted by the Sindarin Elves, and attitude that only changed after the second migration stream: because these true Dwarves, who called themselves Khazâd, were the offspring of a much greater culture, they soon won the Elves’ trust.

2. General characteristics

Since they were created according to Aulë’s wishes, they reflected his particular fondness of crafts and the elements of earth, rock and metal. By their very nature they were miners and smiths, which lead them to be the most prosperous people of Middle Earth.

With their craft came greed, a trait most disliked by both Elves and Men. If the relation between the Elves and the Dwarves became sour over the years, this was mostly caused by the desire of the Dwarves to at any cost obtain, guard, protect and retrieve their treasures.
The pinnacle of this Dwarvish greed can be found in the decision to close the gates of Khazad-dûm when in the year 1697 of the Second Era Sauron attacked Eriador, thus ending a very fond and mutually beneficial relationship with the Elf Smiths of Eregion.

The Dwarves are also a very secretive people. Very little is known about their rituals, religion or even language. They hold their pride and traditions in high regard, and it is also remarkable that they were not notably influenced by the Seven Rings of Power given to them by Sauron in the Second Era.

One fact about the Dwarves has lead to strange speculations and extraordinary tales, not only in Middle Earth itself but also amongst contemporary Tolkien readers: the apparent absence of She-dwarves.
Amongst Men, the tale was told that Dwarves were carved out of stone, and it was also given as a possible explanation for their love of rocks and their stern appearance. In truth, only one third of the Dwarvish population were females, and this number continued to decrease. This also lead to a further decline of the Dwarvish race: not every She-dwarf married, either because she chose to live without a partner or because she could not be with the one she loved.
This does give us a hint as to how the Dwarves viewed marriage: it seemed love was important, even more than the continuance of the species.

3. Relationships with other peoples

Although Dwarves seemed to have a difficult and dual relationships with all species, their sworn enemies were the Dragons. Blessed with an equal greed, many of the Dwarvish treasures were sooner or later taken by a Dragon, along with the cave or mountain in which it was kept. In the Third Era, this happened to King Thorin I who founded a colony in the Grey Mountains, resulting in a return of the colonials to Erebor.

In the year 2770 of the Third Era, the Dragon Smaug attacked and conquered Erebor, one of the last great Dwarvish cities. It was the Hobbit Bilbo Baggins who played a key part in retrieving Erebor for the Dwarves in the year 2941 of the same Era. This resulted in a new found fondness for the Hobbits, one of the few species never to have experienced the downside of the Dwarvish spirit.

The difficulties between the Dwarves and the Firstborn, the Elves, are well-known. What caused them, though, is not easy to point out.
Most likely, culture was a great obstacle between the two species. The inherent differences must have gravely hindered a rapprochement, the Dwarves being greedy creatures with a great love for what lies beneath the earth’s surface, the Elves adoring starlight and nature as a whole.
There are many moments in the history of the Dwarves, where they deliberately or unwillingly harmed the Elves, mostly driven by greed. In the First Era , Dwarves of Tumunzahar killed Elwë Thingol (Singollo) and plundered Menegroth. The Dwarves of Khazad-dûm developed better relations with the Elves of Eriador, especially the Elf Smiths of Eregion, but ruined this in the Second Era by closing the gates of Khazad-dûm after Sauron’s attack, leading to a massive slaughter amongst the Elves.
After the Battle of the Five Armies in 2270 of the Third Era, the Dwarves systematically buried the hatchet with the other peoples of Middle Earth.

Although greed alone can not explain the difficulties between Elves and Dwarves, it can do so for the tensed relationship between Khazâd and Men. Since many of their treasures had been stolen by Dragons, the Dwarves counted on strong heroic figures to slay them. But greed was not enough to fuel even the bravest of the species, and mostly it were heroes of Men that defeated the Dragon, only to find the Dwarves eager to claim the treasure as rightfully theirs. This did not improve the relationships between these peoples, mostly since both found themselves in the right.

Research: Figwit