They appear to us in human form (with hands, faces, voices and language similar to our own): this may be their real form and their difference reside in something other than form, or it may be (probably is) only the way in which their presence affects us. Rabbits and eagles may be aware of them quite otherwise. For lack of a better word they may be called spirits, daemons: inherent powers of the created world, deriving more directly and ‘earlier’ (in terrestrial history) from the creating will of God, but nonetheless created, subject to Moral Law, capable of good and evil, and possibly (in this fallen world) actually sometimes evil.
They are in fact non-incarnate minds (or souls) of a stature and even nature more near to that of Man (in some cases possibly less, in many maybe greater) than any other rational creatures, known or guessed by us. They can take form at will, or they could do so: they have or had a choice.
Thus a tree-fairy (or a dryad) is, or was, a minor spirit in the process of creation who aided as ‘agent’ in the making effective of the divine Tree-idea or some part of it, or of even of some one particular example: some tree. He is therefore now bound by use and love to Trees (or a tree), immortal while the world (and trees) last – never to escape, until the End. It is a dreadful Doom (to human minds if they are wise) in exchange for a splendid power. What fate awaits him beyond the Confines of the World, we cannot know. It is likely that the Fairy does not know himself. It is possible that nothing awaits him – outside the World and the Cycle of Story and of Time.
– J. R. R. Tolkien, “Manuscript B,” in Tolkien on Fairy-stories, ed. Verlyn Flieger & Douglas A. Anderson, pp. 254-5