I wrote this a few years ago. I'm not 100% in agreement with it still and I don't care for my style but I think it works as a decent crash course into TES cosmology.
Chim isn't something you can really grasp in a vacuum but its pretty simple when you have a idea of what the Aurbis really is.
The Mad God-Head Theory
A Reflection on Elder Scrolls Metaphysics
I don't suffer from insanity?
Let us begin with Sithis, as that is where things began. Before Sithis there was nothing, though some have names and stories for that nothing. In Sithis thoughts came to be. And in Sithis these thoughts were finished before they could materialize. This is the way things were supposed to be. Sithis is the state of a healthy mind. When our ideas become solid and start having ideas of their own: one becomes many and is lost amongst itself.
An ailment came to this healthy mind, though the nature of this ailment is unknown it is not so hard to speculate. The two ingredients for Sithis were Anu and Padomay, Stasis and Change, Order and Chaos. If the balance between these two were disrupted, say more Anu than Padomay, ideas would form and not be "consumed" quite as quickly. "Mentally unbalanced".
So, some ideas got stuck, itches were left unscratched in a manner of speaking. These were the first of the et'ada, the "original spirits", and the beginning of an unparalleled case of dementia. These first et'ada, among whom purportedly was Akatosh the dragon god of time, helped other ideas gain form and shape. Each passing moment, or cycle, Akatosh "saved" more. The world they knew is lost to us. One could guess that at this point there was only a growing case of multiple personality disorder and that they were all still familiar with reality. This, though, was only the beginning.
Eventually, presumably as the health of this mind worsened, the wash of Anu and Padomay began to give way entirely. The two parts became polarized in what is now known as Magicka and "Void". In a twisted sense, bi-polar. The et'ada reflected this in their "alignments".
It is around this time that the mind, naturally, tries to heal itself. Lorkhan, the "trickster", is born. He approaches the et'ada with a plan to create a world of their own (most likely as a contrast to reality). They would shape it and rule it how they pleased, if at great sacrifice to themselves. Lorkhan's intentions were of course otherwise, however his exact plan and whether or not he achieved what he set out to do is up for debate.
Most of the et'ada agreed to this and so they set to work creating all kinds of barriers to hold their fantasy world intact and keep reality at bay. Only too late for most of them was it realized that through their sacrifice they would cease to be independent beings. They would not rule in their fantasy world, they would become part of it; no longer capable of affecting the "Godhead".
All of the member-creators of this fantasy world, the Mundus, would come to be known as the Aedra. Those select few who had refused Lorkhan's pact, and their eventual minions (arguably their own dementia), would come to be known as the Daedra.
Ah, the Daedra. Those few who were wise enough, paranoid enough, or just plain lucky enough to avoid Lorkhan's trap. They looked at what the Godhead had done, he had created a fantasy world within himself, though in a way unwittingly and at the mercy of his own insanity. They decided to imitate this. They created realms inside of themselves, populated by minions which consisted of themselves (again, I believe this is them going through the same insanity of the Godhead, each of their minions is an aspect of their own split-personality). These were the realms of Oblivion.
A few of the Aedra did manage to escape their prison/fantasy world, Magnus being the chief amongst them. They are said to have gone to Aetherius, the origin of magicka, Oblivion's counterpart. The stars are the holes through which they escaped. Why the Mundus has not heard of them since is open to debate. One could argue (one being me) that the stars are bits of reality shining through onto what would be the graveyard plane of Mundus, but that's another proposal to be made at another time.
Despite these, relatively few, et'ada who escaped Lorkhan's plan (the stars and Daedra) it would have been a stunning success. He had trapped the vast majority of fractured personalities and they would all eventually die. However, something happened, as somethings often do. It is unclear whether the remaining (and now very pissed off) Aedra sidetracked the plan, or if Lorkhan became infatuated with his individuality and thus tried to stop the project himself.
All of the et'ada trapped on Mundus did eventually die, or rather ceased to be conscious (perhaps with the exceptions of Lorkhan and Trinimac who are survived in Sheogorath and Malacath respectively). However, some of them left aspects of themselves, the Ehlnofey who's descendents would number the "mortal" races.
Yes, reader, Akatosh is long since dead. Of course the mortal races, being pieces of pieces of a fractured mind do have a conduit by which they control their world. Their beliefs affect, to an extent, the Godhead's beliefs. Mind over matter, or matter of mind, as it were. And so their beliefs about the now dead Aedra can be projected into the world around them.
Let's recap. GH (Godhead) went insane. His many personalities derailed his consciousness almost entirely. In response, Lorkhan is born. Lorkhan tricks most of the fractured personalities to follow him (like the pied-piper) into their own private world completely separate from reality, where he was to then let them all rot and die for the sake of GH's sanity (presumably). Those who did not follow Lorhkan, the Daedra, became insane and imitated the cycle, spawning many smaller personalities of their own in the realms of Oblivion. Those who escaped Lorkhan's plan were never heard from again. After Lorkhan's "failure" Mundus became somewhat similar to the original Sithis, "mortals" coming and going. Thus, the Aedra were, for the most part, sane. That doesn't help GH's sanity any, though, as it is now even more fractured than before.
That brings us up to speed and is the current state of things. Of course it cannot remain this way forever. Nordic legends imply that Lorkhan had an accomplice in his plan (undermining one system to fix another). The esteemed Mehrunes Dagon. This is easy for me to believe in that his realm, destruction, would be vital for the curing of the GH. If all of the fractured personalities were killed off things could start really healing. Of course Dagon is himself insane, which kind of puts a damper on things. He neurotically destroys, unaware of why anymore. So the mission is lost.
The GH will continue to try and cure itself, fighting against it's own insanity. It will try to reunite all of it's fractured personalities or, barring that, get rid of them. That is what Chim is, the realization of not being the individual you thought you were but still existing. "You" cease to exist, but return to the GH, and so you really only begin to "exist" in reality. That is the final note of the Mundus, and the realms beyond. The returning to Sithis, mental health, and reality. Whether that's a good thing probably depends on who you ask.
Or perhaps the many layers of insanity will continue to quash each other's attempts at a cure. The Mundus, with it's keepers dead, will continue on and on until finally the GH's divine flare expires. The returning to that nothing of before, for which some have names and stories for.
Additions:
The Sithis Shaped Hole
"Sheogorath (The Mad God): The fearful obeisance of Sheogorath is widespread, and is found in most Tamrielic quarters. Contemporary sources indicate that his roots are in Aldmeri creation stories; therein, he is 'born' when Lorkhan's divine spark is removed. One crucial myth calls him the 'Sithis-shaped hole' of the world." - Varieties of Faith in the Empire
It is possible that Trinimac ripped out Lorkhan's heart, as some legends say, and at this point perhaps Sheogorath was born. That doesn't need much explaining, though, and is kind of dull. I have another theory:
Lorkhan was created to restore Sithis; to restore sanity. This requires all of the fractured-personalities to let go and achieve Chim. To lose their individuality and return to the whole. Many if not most of the spirits (et'ada, mortal, or otherwise) are not going to be crazy [excuse the pun] about that. Lorkhan was no exception. Utterly afraid to lose his individuality, his personality, he became something different. What he became was Sheogorath, the god of madness -- insanity.
This irony was all that was left for the personality born to restore sanity; madness was all that was left. What is the significance of his heart being left? It gets mighty figurative here, but someone's "heart" is their essence. His essence, his purpose, was sanity. The only way he could reasonably hold onto his individuality was to lose that essence and become insane. His heart was "torn out". Possibly with the voluntary aid of Trinimac, possibly not.
Sheogorath is the "Sithis shaped hole" -- the absence of Sithis -- the absence of sanity -- madness. I believe this phrase confirms that Sithis represents sanity.
thanks: Carrickfergus
Important Quotes:
"Pretty soon the spirits on the skin-ball started to die, because they were very far from the real world of Satakal." - "Satakal the Worldskin", Yokudan Creation Myth, Monomyth
[Here we have reference to a "real world" which the et'ada needed, lest they die. I'm pretty sure "Satakal" is in reference to Sithis. Why are the mortal races mortal, afterall? Can an idea which has no connection or correlation with reality last for long, even in a deranged mind?]
"One of these, Lorkhan, was more of a limit than a nature, so he could never last long anywhere." - "The Heart of the World", Altmeri Creation Myth, Monomyth
[What is sanity but a rational limit on what is considered possible? How long could it last when surrounded by insanity and impossibility?]
"So Sithis begat Lorkhan and sent him to destroy the universe." - Sithis
"What is the Tower's secret?
How to permanently exist beyond duplexity, antithesis, or trouble. This is not an easy concept, I know. Imagine being able to feel with all of your senses the relentless alien terror that is God and your place in it, which is everywhere and therefore nowhere, and realizing that it means the total dissolution of your individuality into boundless being. Imagine that and then still being able to say "I". The "I" is the Tower." - Vehk's Teachings
"It is the existence of the True Self within the Universal Self?" - Vehk's Teachings
Sources:
http://til.gamingsource.net/mwbooks/monomyth.shtml
http://til.gamingsource.net/obbooks/sithis.shtml
http://til.gamingsource.net/mwbooks/varietiesoffaith.shtml
http://til.gamingsource.net/obscure_text/aldudagga.shtml
http://til.gamingsource.net/obscure_text/vehk_teaching.shtml#3