Legacyverse headcannons for Source Dragons:
First elements created came from Motion, Strength, Focus, and Energy. Then, Balance, Flow, and Life helped them to add more elements to make original Compass (without outliers yet).
Motion, Strength, Focus, and Energy, using their right as the first ones who made elements, made both Creation and Destruction essences. Originally, they wanted to make only Creation, but they didn't want to mess with Balance, so they made its opposite right on spot.
But the Balance still interfered: he cut (normal/mortal) dragon's access to Destruction, and created Oni to wield it.
Life, Flow, and Balance decided to add something more, but they started to have some disagreement. In the end, Life manifested FSM as someone who would use Creation and Destruction to help, well, the life to thrive in all realms.
Since Flow had beef with Life, she created Wojira, creature of chaos that would not let the life thrive around, and created first 2 outliers for this: Water and Wind. However, later she reasoned with Life, so she passed these 2 elements to Nyad and the first master of Wind to stop Wojira (same must defeat the same).
Dragon of Balance is a type that loves to follows the rules, but can be a jerk that uses rules to mess with you when you're on his bad side. That's why most of the Source dragons dislike him. So, he knew that there must be something that must oppose FSM, and since he's a jerk, he created Overlord for this. Also, while FSM was battling Overlord, Flow and Life were fighting with Balance, and because of some metaphysical injuries, last 2 Ninjago Outliers, Time and Amber, were manifested.
Source Dragons like to peek on work of others to make a new Elemental Power. That's why we have Form and Size, Surface Tension and Water, Earth and Quake, Reflex and Speed. Sometimes, new powers can be done to spite another dragon, for example, Crystal and Amber (well, this one on the wrapping up stage) were created by Balance to mock Life's Green Element of Life Energy Power, while Surface Tension was manifested by Strength because he doesn't like Jesse as Cole's love interest (so he needed to have revenge on Flow; btw, he's cool with Geo, it's just because he thinks Jesse is a weak match to someone of his champions).
Life decided to leave the Council in S3 finale because they have depression after every threat that happened to the living creatures. They don't see any sense of trying again if there's always something that wants to harm the life. Hopefully, Lloyd will talk to them, and his experience will make them to reconsider and find a new motivation.
The idea of the Source Dragons trying to out compete w/ one another and that's why we've got some of the more ridiculous outcomes of elements is hilarious, and Balance creating the Overlord is insanely based actually (but damn did Jesse need to catch those strays ahjhhddsdfhjh)