Midgarsormr

[Enkidoh]

Beware spoilers, but I kept things as vague as I could.

Who or what is Midgardsormr (in game, not the real world name roots):

He is an ancient dragon from an entirely different planet. For reasons not entirely clear, he fled his home world with a clutch of eggs called the First Brood. This brood includes famous dragons you may have met such as Nidhogg.

Actually,

we know why Midgardsormr fled the Dragonstar, it was because Omega arrived on the planet and laid waste to it - basically Middy is the last of his kind which is why he's so powerful. Basically dragons are aliens not native to Hydaelyn. He basically arrived on the Source Hydaelyn as a intergalactic refugee, but yes he was allowed to settle on the Source by Hydaelyn if he vowed to protect the planet and the people on it - presumedly this is why he led the Dravanian Horde to protect Silvertear Lake from Gaius's invasion fleet. A lot of the specifics of Middy's pact with Hydaelyn is a big unknown though, and the whole thing is still very murky.

As for why

Middy sealed the Crystals, it was because of the very Blessing's nature - every time Hydaelyn steps in to help the WoL she's weakening herself to do so - Middy mistook the player's character as not Hydaelyn's champion but just some upstart mortal that was stealing her powers, so he thought by sealing the Blessing it would show you for what you truly were.

The joke was on him though when you successfully relight the Crystals and re-create the Blessing yourself through your struggles in HW, proving without a doubt you really are who you say you are (actions after all speak louder than words). This is why he turns himself into your mount on Azys Lla, he feels sincere guilt for what he did and wants to make amends to you for doing so - a dragon willingly submitting themself to such servitude is a major honour, and for the dragon's Primogenitor to do that....

As for Middy is meant to be a reference to the Midgard Zolom in FFVII... it is, in a way, in that Midgardsormr is a reoccuring enemy/summon/character throughout many FF games, and FFVII wasn't even the first either (he first appeared as an Esper summon in FFVI, although like his FFVII appearence his name was originally mistranslated in the original 'FFIII' US SNES version - in FFVI's case, he was mistranslated as 'Terrato').