On a bridge just north of the Celestial Dome Knickknack told you he wanted your help killing cows and dumping them into the river. Now kobolds may not be the nicest creatures out there, but they are definitely not evil. They're more a part of nature than a force against it. You are forced to kill Knickknack and his behavior really bothers you. Something isn't right here.
So you decide to go up to the Kobold Camp to see if you can learn anything. You meet Tschakschak the Exiled. He tells you the chef is spiking the soup. He's putting some ingredient in the broth that is making all of them go crazy. After eating the soup all they want to do is destroy things. Tschakschak was exiled because he refused to join the others and have the soup. If you kill the chef he says you'll be doing everyone a favor.
So you head into the camp and find Master Chef Niggle. He doesn't offer you any soup which is fine with you because he says it won't 'agree' with you. Right after chatting he attacks. Looks like he's been sampling from the pot himself. You take him out and spill the stinking brew on the ground so no one else can eat it.
You head back to Tschakschak and tell him the news. He says not everything has been destroyed and you realize he's referring to you. He says you won't be following Mother earth any more and attacks. Bad move on his part as he won't be following anything now. All the 'crazy' ones are now dead. The kobolds won't stop fighting the elves but at least they'll be behaving normally from now on.
This ends part 2 of the chain quest. Part 3, Life in the City - Shadow, starts on the northern side of the elven capital, Thylysium.