The origin of the elves in Iceland (álfar in Icelandic) goes back to Germanic paganism and mythology. They were originally a race of minor gods associated with nature and fertility.
In Iceland, elves were mentioned in both the sagas and the Eddas (Prose Edda, by Snorri Sturlusson). They can be the same size as humans or even smaller, and are dressed like humans.
Elves are usually invisible, but can be seen if they feel like it. They can be helpful and kind to those who do them no harm, and repay favors with favors. On the other hand, they can also be malicious and take revenge if harmed.
Elves in Iceland are often pictured as splendid and beautifully dressed, especially in colorful silk. They usually dwell in nature, especially in forests, rocks, hillocks, wells and springs.