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Dollmaker (i.e. Icewing) did NOT sire children with the dwarf royal line. The Great Dragons (primarily Icewing, Mountain Shadow, and Earthroot but including the others still allied with them) developed a "formula" (a potion) that extends a Namegivers lifespan at the cost of making them increasingly infertile. This was their attempt to create a stable power-center to counter Iopos and the Denairastas.

The "great mistake" mentioned was the dragons breeding into the namegiver races in the era of magic before the current one. The primary result of this was the elven nobles houses and the random "immortal elf" that pops up inside them (enough dragon-blood + mutation). Some of these immortals rebelled (the discoverer of the Books of Harrow may have been one of them), and went on to found the Eternal Library on Thera (and then coach Thera into an Empire from behind the scenes). Some of this history is in the Blood Wood sourcebook due to the blood ties to the royal elves.

Drakes were created as a replacement for these "failed servants". Drakes are created from whole cloth, and are pretty hard to make (but Icewing has a lot, hence the title "Dollmaker"). The Outcast is called that because he refused to stop breeding with Namegivers.

Creating dragonkin was forbidden after children of Alamaise (Immortal/Great Elves) led rebellion against dragons when they where sleeping at some point between Age of Dragons and 3rd Age. Before that it wasn't a crime to lay with younger races.

After that, the only dragonkin creating dragon is the Outcast which is why he was cast away in the first place. Alamaise had different aproach toward his children - he thought lesser of them.

Outcast encourages Deinarastas to rule above all Namegivers and embrace their higher place above younger races.

There is elaborate fan theory about how banishment and discovering Book of Harrows was a plot conveyed by those Immortal Elves who wanted to create something that equals the power of Great Dragons (Theran Empire).