We know that Daedra refused the creation of the mortal plane. We also know that Daedra cannot create.

I've always been under the impression that the Et'ada we now know as Daedra were the Princes. However, the above line would mean that all the currently existing Daedra - scamps, dremora, ogrims, atronachs, every single of them, has existed all the way from the creation. Daedra cannot die or create, so logically, their numbers must have never changed. And that means that there were countless Et'ada to begin with, since the number of existing Daedra is potentially infinite.

Then there's the question of intelligence. How can a being who has had the sense to ponder whether to create a world or not be reduced to something like a lesser Daedra? Hell, in the "Book of Daedra", Xivilai are said to be "without thoughts", i.e. nonsentient.

Am I missing a link somewhere, or is the subject just generally confusing as hell?

They are constantly being created and uncreated in the chaos of the aurbis. Their numbers could be considered constant but in flux. They gain some greater measure of stability by the influence of the princes realms.

And why would they all be of equal capability? The xivilai are so weak that they can barely keep a physical form without Dagons aid, they don't really have time to consider the deeper implications of their existence.

Xivilai are one of the higher orders of Daedra, said to be like Dremora but more independent and free-minded. Certainly not non-sentient.

I messed it up. I was thinking Vermai whilst typing Xivilai. Sorry.

But while being created and uncreated, doesn't that refer just to their physical form? I was under the impression that their sentience and memories remain.

They do. They remember all the tortuous experiences they've had in the Waters of Oblivion while waiting for their physical forms to be reincarnated, and they've lived for so long that most have become bored and complacent with existence. Hence why they're always so grumpy.

Bored and complacent? More like tortured and driven insane from the waters.

Well, that too. I was thinking of that one quote by Imago Storm...