I read that Naarfin only attacked Cyrodiil to keep the legions from helping Hammerfell, while the main point of the whole war was to simply take Hammerfell. Naarfin only continued attacking Cyrodiil cause of his initial success.

Originally, the Dominion wanted Hammerfell in the Ultimatum, they wanted large parts of it. After the war, on the White-Gold Concordat, they still wanted large parts of Hammerfell.

So why in the world would they want Hammerfell!? What's so important there?

And the Redguards kept fighting after the Concordat - and actually 'won' (successfully defended their homeland). They probably took just as much damage from the Dominion as the Empire... so my question is, what if they Empire kept on fighting!? If the Redguards won, surely the Empire - which consisted of Imperials, Bretons, Nords Orsimer and the Redguards (they would have stayed with the Empire had they not surrended) could have won.

The Empire may have been in no position to fight... but then again, neither were the Aldmeri Dominion! I know this because if the Dominion could still fight, they would have pounced on the opportunity to take the weakened Empire as soon as possible... so they were weak to because they didn't!

If I had to take a guess, two words:

Adamantine Tower.

also explains why they stopped when they took the imperial city white gold was built to replicate adamantine and the imperial city is the ilied representation of nirn, a wheel within a wheel that thing is dangerous if used improperly as I suspect the thalmor want to