NOTE: this information is known by all elves but is never revealed to other races. Other races, over long centuries, have gained hints and rumors of the elven life-cycle; whenever the truth is fully discovered, the elves ensure that the information, and those who know of it, are wiped out.
The basic truth of elves is that elves are not native to the mortal world. When the ancient elves first arrived in the mortal world from elsewhere (where has been lost even to elven knowledge) they were spiritual, non-corporeal entities made of pure energy.
The ancestors of the elves arrived when humanity was still in its infancy, only recently evolved from the proto-human, near-simian man-apes that preceded true humans.
The energy beings encountered these creatures and possessed them, becoming the first elves.
As the world then was covered in primeval forest, and the elves embraced the life-energy of the forest, they adapted their bodies to become best adapted to the forest. In all the long millennia since, the elves have never lost this connection to nature and the living world, not even the aloof gray elves nor the corrupted dark elves.
Over time, the first elves slowly molded the bodies they had possessed to what they considered a superior form, what is today known as that of the “sylvan elf” or “wood elf.” This form is smaller than modern humans, as humans of that long-passed age were smaller than modern humans (the sylvan elves were taller and more muscular than the humans of the day).
The elf-spirits did not like the hairy bodies of the humans, and so rid themselves of all hair save for that on their head and their eyebrows. Eyes were made larger, the better to enable darkvision and improved eyesight; similarly, ears were made larger and pointed, to improve hearing. The elves could also change their hair, skin, and eye color at will, the better to express their individuality.
Not wishing to limit themselves to either the male or female form, the elves made themselves capable of remolding the sexual form of their bodies, and thus they may become male or female, neither (neuter) or both (hermaphroditic) as they wish (a change that requires several days to go from male to either neither or both, then to female, and vice-versa). As a result, all elves are physically androgynous in appearance, even those who prefer the biological male or female sexual form to any others.
This sexual polymorphism was due to seeking out differing pleasurable experiences with the physical body; due to religious and cultural reasons, the idea of childbearing was anathema to the first elves (this is no longer true of elves in general, see below). The first elves would never use their own bodies for such distasteful activities (essentially, childbearing was considered equivalent to hosting a parasitical growth).
For long centuries the superior form and technology of the first elves (for the first elves quickly developed advanced technology and civilization from long-buried racial memories of their pre-energy life form) kept the elves alive and in good health. Then the first elves experienced the first physical death among their kind.
They sadly discovered that the spirit of the deceased had become too tied to the body it had long inhabited, and so could not possess another adult body. However, after some experimentation they discovered that the spirit could inhabit the newly-conceived fetus of a human child. The child grew to term, and then after its birth, they retrieved the child by exchanging the newborn with a wolf cub they had polymorphed into a human child. This was the first changeling (and also the origin of lycanthropy, as that human child became the first werewolf).
And so, the issue of the rebirth of existing elves was dealt with when the circumstances first required it. This sparked the issue of the population growth of the elven race, for the human population was growing even as human civilization was quickly advancing (by elven standards).
In all too short a time elves would be grossly outnumbered and perhaps brought to extinction.
However, as the bodies they had taken and improved upon were still, for all intents and purposes, human, they believed they could reproduce with humans.
After some experimentation it was discovered that elves could, indeed, reproduce with humans. And not only physically; in half of all cases the child bore an elf-spirit, while in the other half of all cases the child bore a human soul.
Those of elf-spirit could, when taught properly, mold their bodies as did the original elves, and their spirits lived on to reincarnate as did the other elven spirits. Those of human-soul, however, could not mold their bodies, nor live on to reincarnate, for they did not have an elf-spirit, but instead had a human soul.
And so over long millennia, the first elves grew their numbers by mating with humans and then taking the elf-spirit children who would grow into proper elves (usually leaving a changeling in its place in payment). In most cases, the half-elf children were left to their own devices, though in some cases there might be some interaction, either with the parent or with the community, depending on the community of the elves.
Then came two schisms among the elves at the same time.
First, many elves noticed that humans had physically improved over the long age; they had grown taller and stronger, more intelligent and capable, and had taken to domesticating animals, growing gardens and grains, and settling in small hamlets and villages. Some of this they had learned from the elves, other things (such as primitive metallurgy) they had learned from the dwarves. And some of the elves were worried that as a people, they were being left behind.
A great number of elves, though not the majority of elves, decided that the elven people needed to evolve.
Against the advice of most of the first elves (who at this point were mostly in their fifth to seventh incarnations), many of the younger, third and fourth generation of elves morphed their bodies en masse, to something similar to or even superior to that of humans. These elves, the high elves, were also the first elves to abandon the strict forest lifestyle of their ancestors.
They then did humans one better and, using their advanced technologies and ancient ancestral memories, built towns and cities when humans had built hamlets and villages. They moved out of the forests and into the meadowlands. There they built vast fields to grow the grains needed to support an advanced civilization. Some humans they adopted like pets, others they enslaved to do their bidding. And so, the first great elven civilizations arose. They allied with the dwarves against the giants and the dragons, and created a time of peace and plenty, which even in human lore is remembered as a golden age.
The first elves who still led the sylvan elves watched all this in horror. Some of them even went mad when they discovered that the high elves had taken to procreating among themselves! Most of the first elves met in conclave and decided that they had to come up with a way to strengthen the sylvan elves against their erstwhile cousins. Of two minds – sane and mad – one group decide that they needed to outdo the high elves and transform themselves into the most potent elven form possible; the other group decided that it were best to call upon the life-force of the forest and to meld with it, to protect the sylvan elves and the forests from the expected depredations of the high elves, who they felt had become too human.
Then from the first elves (all but a few) were born the fairies – the gray elves, the ultimate form of elf (at least, in their own minds) known as faerie elves, and the fairy races, such as pixies, sprites, nixies, and others, born of the merger of the first elves and the life force of the forests. Which faction was sane, and which was mad, none today knows, not even amongst themselves.
In the case of the gray elves, they decided to remain aloof from both high and sylvan elves, seeking to live their lives as an example to their cousins. They moved to hidden mountain valleys and other isolated locales, there to further develop the ancient magic that was inherent in the elven form and to study the very nature of the cosmos and existence. Eventually, over time, these became their obsessions, and they mostly lost their way, though some gray elf peoples continue their self-imposed guardianship of all elven peoples.
The fairy folk, whatever their original ideals and plans, quickly fell into the eternal reverie and merrymaking that is the fairy way. They remain staunch allies of sylvan elves and guard the forests, though now more for their own purposes rather than for all of elf kind. Though they were born from the first elves, the process of unifying with the life force of the forest shattered the spirits of the first elves, and their memories, such that there are few among them today who recall their origins, and even fewer who retain any complete memories of one of the first elves, so jumbled have the spirits of the first elves become.
Over time, without the direct influence of the first elves, the sylvan elves and fairy folk turned to procreation within their own kind. However, many sylvan elves and fairy folk, and even some high elves, continue the ancient tradition of the changeling, the better to bring in new blood to improve the ancient bloodlines. But today, most reincarnation of elven spirits occurs with an elven mother, rather than a human host.
The gray elves have developed an intermediate form of procreation, having developed a form of parthenogenesis. Whenever one of their number dies, a friend, with whom arrangements were made previously, takes on the female sex (most grey elves prefer to remain biologically neither male nor female) and becomes host to the reincarnated spirit of the deceased, the host for the spirit forming via parthenogenesis.
The origin of the dark elves is intertwined with the arrival of the forces of Law and Chaos in the mortal world at the end of the golden age of the elves and dwarves. When Chaos was brought into the world through the civil war between the hosts of the gods of men, it sought power among all the peoples, not merely humans. Some high elves found the whispered promises of Chaos much to their liking, and so began a war of elf versus elf for the first time in all of elven history. In the end the elves aligned with Chaos lost the war and fled underground, where the survivors became the ancestors of the dark elves, held in thrall by the dark lords of Chaos.
Elves self-reincarnate; that is, when an elf dies, its spirit separates from the body and seeks a new host body. Most elves have made previous arrangements with friends to host their spirit prior to death. Unfortunately, elven spirits can travel no faster in incorporeal form than they did in physical form (though they fly, and terrain is not an issue), and until they find a host, their cohesion and memory slowly degrade over time.
Some elf spirits never make it back to a host, and they either fade away or end up being pulled into some other direction. Some are found by demons, devils, ghosts, and other spirits, and are lost. So not all elves reincarnate, and even those that do have usually lost a significant amount of memory.
Some elf spirits, weak and fearing being lost forever, reincarnate in beings other than elves. If an elf spirit reincarnates in a child born to a human, it will be reborn as an elf, though will seem to be a fey human until it attains puberty, upon which most of its remaining memories will return to it (unless it is found by elves and raised among them, in which case its memories start manifesting shortly after infancy).
If an elf spirit reincarnates in a child born to a dwarf or gnome, the child is a gnome, and always remains a gnome; memories manifest at puberty, but the gnome remains a gnome. If an elf spirit reincarnates in a child born to a halfling, the child is a tallfellow halfling; memories manifest at puberty, but the halfling remains a halfling. In these cases, the gnome or halfling cannot be raised from the dead, and when it dies the elf-spirit is free again to seek an elven host.
Considering that most elves have been reincarnated many times, and each time memory degrades somewhat to nearly entirely, an elf has only glimpses of its past lives available. Only the first elves had near total recall from previous lives; these are now very few, most of them being gray elves, a few remain among the high elves and sylvan elves, and sadly, the memories of even the first elves among the fairy folk have been highly dis-articulated, disbursed into the life force of the forest and reintegrated in bits and pieces among the various fairies.
There are also odd cases where elves are reincarnated into non-human and non-demi-human forms. Some elf spirits, lost and weakened beyond consciousness, take shelter in the bodies of animals, and are born into animal form. In most cases these creatures manifest as highly intelligent animals that can speak Elvish (and perhaps other languages the elf-spirit knew).
In more exotic cases an animal born with an elf spirit morphs into a semi-humanoid form, becoming a most unique creature indeed! As this kind of thing has happened no few times over long, long millennia, there are forested regions where elves once live, but were wiped out, where strange animals reside in numbers. These creatures are usually allied with the fairy folk of the region. Some sages say this is the origin of dryads, treants, satyrs, bear-folk, harpies, and other sylvan creatures of semi-humanoid and/or high-intelligence. The elves themselves, of course, do not speak of such things…