The Nephilim unknowingly locked in the underground refuge during the Flood did not immediately become dwarfs. Rather, this was a gradual process as the few clans intermarried and their isolated lifestyle gradually turned in on itself. As a people, they became very very greedy, consumed, in fact, with avarice. They learned much of the use of their power to work metal and gems in wondrous ways, such that when they did rediscover the surface, they would quickly develop a well deserved reputation as craftsmen without peer.
At some point in the distant past, not long after their re-introduction to the surface, the dwarfish people split along clan lines, and some left their homes and migrated north. Dissatisfied with the inhospitable climate they found, their descendants became determined to retake their ancestral lands. To ensure their victory, they had the idea of creating a subservient race. They chose as the base “material” the great apes, which at that time did not only exist in Africa. These northern dwarfs reasoned that the resulting size and strength of their servants would make for excellent berserkers. Thus the trolls were created, but not without great cost, both to the creators and to the world at large.
The world at large paid dearly in that the creation of the trolls consumed the population of great apes in much of the world, and only in Africa and parts of Indonesia can we still find any remaining. The northern dwarfs who created them paid in their own beings. The angels smote them hard, for in making the trolls the angels judged that they had mocked the Creator both in creating something made in the image of man, and in daring to attempt an act of creation. The angels smote them in their shape saying to themselves that they no longer deserved to bear the shape they had blasphemed. Thus they were made deformed, and those who saw them from thenceforth would no longer call them dwarfs at all, but would name them goblins. So too they also smote them in their minds, saying to themselves that the evil ones had abused the mind no longer deserved its use, and they lost the imagination that allowed them to be artisans of such renown, while at the same time the desire for the works of their hands, works they could no longer perform, was trebled, so that it became a constant mental torment, the desire to own that which they could no longer produce.
Thus the goblin wars started. The goblins, jealous of their dwarfish kin, first stole from, and later began to kill those who could still create. The Dwarfs, while not as consumed by greed as the goblins, were themselves far from an unselfish people, and would retaliate. War developed, and dwarfs and goblins would wage subterranean warfare until at last the true dwarfs were wiped out. In the process of this however, two things would happen.
First, the goblins lost control over the trolls, who now range free. Lacking immortal souls and true free will, the trolls never rose above the level of wandering tribes. They have only the most rudimentary of languages, and some experts even refuse to grant that trollish communication is in fact true language. They opine that “language” requires more than nouns and verbs (trolls lack all concepts of adjectives and adverbs except a highly simplistic concept of amount). Only the most intelligent of trolls are capable of learning to wield a weapon, even a club, without self injury, and only the truly exceptional can be trained to follow simple directions and act as “security trolls.”
Secondly, some goblins and dwarfs had relations of a sort - war is never a pretty thing, and these were once one people. Magic does strange things, so some of these children were viable and even fertile. A few of them were sufficiently “dwarfish” that though they are still called goblins today, they look rather less hideous than Tolkien (for example) describes, and are capable of sufficient civilisation that the nephilim of today no longer remember the dwarfs at all, but rather ascribe to the goblins the full history of both peoples.
In their pride, the nephilim believe the humans are stupid believe in the myths of dwarfs. There are very few across the world who know that the real history is far closer to the stories that human myth makers have come up with than the “history” that the nephilim teach. These few, for a variety of reasons, stay silent. Some respect the International Statute of Secrecy as law, even if they might privately consider it misguided. Some truly believe the separation best for both sides. Some are wise enough to realise they cannot change the status quo.