According to the prose Edda, they bred like maggots in Ymer’s dead body; but the Voluspa tells us that they were created by the gods from the blood and bones of that giant:
Then went the gods
To their exalted seats;
The high and holy
Then consulted
Of them which
Should form the dwarfs
From the sea-giant’s blood,
And his blue bones.
Thus Modsogner is