Of all the many races in Middle Earth, dwarves are arguably the most hardy. They are known for being strong-willed, proud, stubborn and head-strong. These qualities make them very good allies to have in a pinch, but also add to their conflict with the other races of the world, especially elves. But within this battle-worn and hardy race of beings, come some incredible warriors and leaders, who have managed to achieve remarkable things, and survive terrible tragedies for thousands of years. The dwarven kingdoms are some of the greatest in Middle Earth, and have yielded some of the best accomplishments. Their claims to fame include the discovery of Mithril, a rare and precious metal that later saves Frodo’s life; and the procurement of some incredible gems, like the Arkenstone. But these amazing feats do not come without their challenges for the dwarves, and as is well known, these vast hoards of gold often attract unwanted attention.
This is exactly what happens in the Mines of Moria, when Durin’s Bane, the large and menacing Balrog seen in the Fellowship of the Rings, killed the king Durin VI and ruined the once-mighty kingdom. Another perfect example is the fate of Erebor, with the death of king Thror, and the slaughtering of almost the entire race living in the Lonely Mountain, as well as the people living in the nearby settlement of Dale. These horrific events came at the fiery breath of Smaug the terrible, the malevolent dragon who later destroys Lake Town in The Hobbit. However, if the dwarves are such strong and fearsome warriors, why were their vast civilizations destroyed by the coming of the dragons and the Balrogs?
When the dwarves are first created, Aule, their maker, formed them to be hardy, and ensured that they would be resilient enough to withstand the evil that Melkor was pouring forth into the world. Part of this evil was Melkor’s creatures: the dragons and Balrogs that the dwarves would later have to face. However, there is actually no record anywhere in the canon of Tolkien’s works that suggests the dwarves were able to go up against these fearsome beasts and win. In fact, the perception that dwarves are powerful dragon-slayers and can withstand a Balrog’s flames are completely unfounded.
According to the loss of both Moria and Erbor, it’s easy to argue that quite the opposite is true. In fact, the dwarves' greed makes them particularly prone to defeat from such mighty creatures. The only ones who have ever been known to defeat dragons and Balrogs were some of the older elven lords, potentially alongside a fellow maiar being. This may be where the reference to Tharanduil’s hidden scarring comes, as he tells Thorin: “I have seen the great serpents of the north.”
Having said this, even if the race of dwarves were to be excellent dragon or Balrog slayers, as is their common misconception, that still doesn’t mean that they would have been able to defeat Smaug, or Durin’s Bane. Smaug is a particularly large and nasty dragon whose fire is fulled by his hunger for power, his deep lust for his hoard of gold, and his pleasure in seeing those around him suffer at his hands. The only reason that he is eventually brought down is because Bard is a hero, descended from a long line of weapon makers who created the Black Arrow, the only tool stong enough to be able to pierce a dragon’s thick hide. Even then, he still manages to wipe out half of the Lake Town settlement, as well as nearly killing Thorin and his company in Erebor.
Similarly, even Ganadlf the Grey himself, a powerful wizard and fellow maiar, is defeated by Durin’s Bane in Khazad Dum. He only manages to make it because he is brought back to life by Manwe to play the remainder of his part in the War of the Ring, and help Frodo achieve the task of destroying the contemptuous object of Sauron. If a maiar of such incredible strength and power lost to the Balrog, then it is little wonder that the dwarves, no matter how fearsome they are as warriors, were also taken down by the creature, especially considering that they possess no magic of power of their own.
Ultimately, it was the dwarves' own hubris, their own need to dig deeper and deeper into the dark places of the mountains, that led to the Balrogs and the dragons rising in the first place. This was only made worse by the rulers having dwarven Rings of Power that fueled their greed and their isolation from the other races of the world, like elves and men to a certain extent. They were never fully prepared to handle the awful things that they awoke in the dark.