After going through the cave of Gaia's Navel, you discover the hidden Dwarf Village.
Get Better Armor
There isn't much to do in the Dwarf village except go to the inn to rest, buy better armor, and listen to the goofy background music. Make sure that you have 250 GP before going on to the next part.
Have Watts Reforge Your Blade
Go through the door in the northwest of town to meet Watts the blacksmith. Agree to have him forge your sword for 100 GP.
Watch the Sideshow
Next, go through the door to the left of the item shop. There is a fork in the road. Go to the left and through the door. After you go up to the top, a Dwarf will arrive and ask for payment for the exhibit. Pay to see the show, then donate money for the sprite child.
Get a Refund
When the show is over, after you leave the room, go to the right and into the door here. You will hear the dwarf elder and the sprite laughing because they just scammed you! Walk up to them and they'll apologize and give the money back.
Start a Battle
If you didn't visit Watts in the northwest corner of the village, do that now and pay to have him reforge your sword.
Once you have asked Watts to reforge the sword, and you have watched the sidehow, Tropicallo will attack the village.