The disappearance of the Dwemer is one of the most hotly debated mysteries among fans of The Elder Scrolls. However, some of the millions of fans who joined the series with Oblivion or Skyrim may not realize is there's plenty of evidence to suggest what happened. Not only is the Dwemer disappearance a major plot-point in Morrowind, but the game also lays out some clear theories about what might have happened to them.
Here's what is known for sure. The Dwemer, also known as the Dwarves, were a technologically advanced race of Elves that lived beneath Tamriel's surface. In 1E 700, the Dwemer disappeared. It isn't even known if this happened simultaneously, or over time. Morrowind, however, puts forward the three most likely possibilities.
The Cause Of The Dwemer Disappearance
Where the Dwemer went is a mystery, but why they disappeared is not. During the First Era, the Dwemer discovered the Heart of Lorkhan while exploring the Red Mountain in Vvardenfell, the setting of Morrowind.
The Heart of Lorkhan is an Aedric artifact, ripped from the heart of the Aedra Lorkhan — known in Skyrim as Shor — in what is mostly depicted as a Prometheus-style punishment for creating Nirn, the world in which The Elder Scrolls takes place. When the other Aedra tried to destroy the Heart of Lorkhan they found that they weren't able to, and so the Heart was hidden deep beneath the earth, where the Aedra believed it could never be found.
The technological ingenuity of the Dwemer, however, proved them wrong. After Dwemer miners discovered the heart, the Chief Tonal Architect and High Priest of the Dwemer, a Dwarf named Kagrenac, set about finding a way to access its divine power. He created three tools: the gauntlet Wraithguard, the hammer Sunder, and the dagger Keening. He also created the body of a giant artificial god named Numidium, which was designed to house the Heart of Lorkhan. The methods remain unclear, but the ultimate goal was to enable the Dwemer to become gods themselves.
This led the Chimer of Morrowind to declare war against the Dwemer in 1E 668. During the second Battle of Red Mountain in 1E 700, Kagrenac attempted to use his tools to make his people divine. The attempt backfired, and every Dwemer except for Yagrum Bargarn, who was in an "Outer Realm" at the time, disappeared. Yagrum proposes the first two possible fates of the Dwemer.
Dwemer Ascension Theory
In Morrowind, the Nerevarine meets Yagrum Bagarn, who is now plagued with Corprus and and confined to a modified Dwemer centurion spider. "I think Kagrenac might have succeeded in granting our race eternal life, with unforeseen consequences, such has wholesale displacement to an Outer Realm."
This is a convincing theory. After, Kagrenac was clearly extremely powerful and competent, and was able to create tools with the ability to at least partially access the power of the Heart of Lorkhan. The fact that Yagrum Bagarn himself wasn't affected while in an Outer Realm, possibly referring to a plane of Oblivion, does cast some doubt on this theory.
It's not impossible that the Dwemer ascended and became divine beings on another level of existence, but the fact that Yagrum wasn't affected might imply that the power of the Heart was limited to Nirn, the plane of existence its history was uniquely tied to. Nonetheless the possibility of the Dwemer succeeding in becoming gods does make a lot of sense. It isn't the only possibility that Yagrum mentions, however.
Dwemer Destruction Theory
Although Yagrum seems to think Kagrenac probably succeeded in making the Dwemer divine, he also think's it's possible that something went wrong, and the Chief Tonal Architect accidently "utterly destroyed our race." Although the fate of the Dwemer is surrounded by mystery, this is ultimately less convincing that the possibility that the Dwemer ascended. There are reasons to believe that the Dwemer could have transcended Nirn, but there aren't any particular reasons to believe they might have been destroyed other than their disappearance itself.
It's very possible that there was some aspect of the Heart that Kagrenac did not know about and which has not been revealed to Elder Scrolls fans yet, but until it is explained why activating the heart might have destroyed the Dwemer, the theory that they were destroyed is less convincing. That's where the third and final major theory hinted at in Morrowind comes in.
Zero Sum Theory
Morrowind is one of the only Elder Scrolls games to really spotlight the concept of CHIM, one of the strangest and most interesting parts of the entire Elder Scrolls lore. Here's the breakdown as lain out by Michael Kirkbride, an Elder Scrolls writer responsible for a huge amount of lore, both official and unofficial. The entire reality of The Elder Scrolls, Aedra, Daedra and all, takes place in the unconscious dreams of a being known as the godhead. The godhead is similar to HP Lovecraft's Azathoth, the "Blind Idiot God" who exists outside the universe and involuntary dreams the entire Lovecraft Mythos.
It is possible for mortals to realize that they are part of the godhead's dreaming, and therefore aren't real. If they are powerful enough to assert their individuality despite that realization, they achieve CHIM, essentially becoming living gods. This happened to Vivec and Tiber Septim.
Not all of Kirkbride's writings are confirmed as canon, but plenty of his writing has been referenced in later Elder Scrolls games, including ones that reference CHIM. The line "I do this for you, Red Legions, for I love you" spoken by the priest Heimskr in Whiterun is a line from a piece of writing by Kirkbride where Tiber Septim uses CHIM to "reshape" the jungles of Cyrodiil into a temperate climate.
If the being isn't strong enough to assert their individuality, however, they suffer Zero Sum, essentially being wiped from existence. It seems very possible that in his attempt to make the Dwemer divine, Kagrenac succeeded, but in doing so revealed to them the true nature of The Elder Scrolls universe. Unable to handle that reality - which seems very probably for such a scientifically-minded race - they underwent Zero Sum, and vanished.
The Elder Scrolls 3: Morrowind is available now on PC.