The Winter Dwarf was intended as a joke character, guarded by a Dwarf Guard, he was forced to be happy all the time. His only wish however was to be allowed to die in order to escape this life. Players had the option of killing The Winter Dwarf, only to have him brought back to life by his guard with a piece of "Dwarf Nip".
In a perfect example of how rumour can be spread within Guild Wars, it was alledged that by waiting by the dwarf for 10 minutes you would receive a Wintersday hat. This rumour proved so popular that vast numbers of players were crowding each district trying to get this hat (for the most part the hat shown was merely from Wintersday 2005). While by the second day of the festival this rumour had for the most part abated, primarily due to the work of fansites, during the first day of the festival the sheer number who fell for this hoax was a sight to see.
"Look, a guard! Hello, friend guard! No worries here. I'm happy!"
"...Look, kid. You've got to get me out of here. This happiness thing is killing me..."
"Oh, the guard's back! Hi, guard! Don't worry, I'm still happy!"
"...Grenth have mercy, please end my suffering."
"Oh, but you look so cute!"
"Filthy Human! Have you no soul? ...Happy. Yes, I'm totally freaking happy!"
"I'd like to help, but I can't see a way."
"Well, if you see an opening, remember me."
"I think we both know there's only one way out, friend. Feet first. May your next life be...um...less filled with happiness." (kills the Winter Dwarf)
Historical note: You used to only be able to get into the Winter Dwarf's cage by clicking on the Don't Feed This Dwarf sign and you were unable to leave other than to switch districts or map out. The candy cane fence has been changed so that you can walk through it.