In our history faeries have their origin in folklore. What they are depends on the culture, time and place. Some of DnD"s conception of faeries is from the Victorian age cute little winged folks with a dose of "going back to the original" spirit of Tolkien and other fantasy authors. As a consequence there is no defining explanation of faeries.
Since my first campaign this has caused a disconnect creatively for me when it comes to using Faeries in my game. I do use them but in specific and narrow ways. This is contrast to politics and religions where I can think of a dozens of interesting situations and details with a few moments of daydreaming.
Some authors have the knack of what I consider the spirit of faeries. Beings that are dangerous, beautiful, and magical. Raymond Feist's Faerie Tale, and Jim Butcher's use of faeries in the Dresden Files I consider to be excellent examples. They help as idea generators but still don't help be "get" faeries for my own use.
I also collected several RPG Books on Faeries particularly GURPS Faerie and Ars Magica various Faerie books. But it never really clicked for me until I read the newest Realm of Power: Faeries for Ars Magica. Because it offered an overarching explanation. Faeries are what they are because they are magical beings that feed on human imagination and vitality. And they feed by using their abilities to cause people to participate in stories. In short they can generate what they need by directing the fantasy equivalent of a LARP event with the local human as participants. The problem being that many "events" they stage are dangerous.
Like all Ars Magica books Realms of Powers: Faeries has a very exhaustive and detailed writeup of faeries. Plus it is tailored to the Mythic Europe setting of the series.
After thinking about it for a while here a generalization I came up with to help in the future to run campaigns with faeries. Like my other advice, I present it as one possible technique among of host others.
In a fantasy setting, magic manifests itself in many way. One could learn spells as a skills and cast them by drawing on the ambient mana. One could use a elaborately written codex to memorize a spell in such a way that it captures magical energy that later can be released as a spell. Magic can be captured in place into the object. Some creature can channel and/store magic and use it to power a variety of abilities.
Faeries arise from the interaction of magic with human sentience. Life experiences left an imprint on the surrounding magic of an area. In most cases this is fleeting, but if the experience is particularly intense or many people were involved the effects can be far more lasting. Lasting enough to allow creatures to make it the basis of their existence. Those creatures are the faeries.
And like their mundane counterparts these creatures began to act proactively. Not just in finding out places and people who have intense experiences but recreate the circumstances of those experiences in order to continue feeding.
In the fullness of time the faeries began to develop distinct techniques. They also began to specialize in specific type of experiences. Producing a bewildering array of different types of faeries. Since human life experiences are subjective and largely based on the specific circumstances of family, cultures, and geography there is little consistency in the abilities and actions of faeries.
However faeries are not the only force in the setting; other types of magical creatures, magic users, and above all religions. Faeries are in essence scavengers and often have to retreat when confronted by other supernatural forces. This results in what is the most consistent aspect of faeries; that they exist on the margins of civilizations and as folklore.
This works for me as a general explanation of faeries that I can apply to a variety of setting other than the Mythic Europe of Ars Magica. From this I thought of a more specific set of guidelines.
Many faerie powers are illusions. Things created by faeries seems real until the experience ends or the person leaves the immediate vicinity of the faerie. Then they revert to their true nature or outright disappear.
Faeries vary in their abilities to recreate experiences. The average faerie is not very good at doing this. Allowing an observant person to spot that something is off and figure out that they are in the midst of faeries. The ones that are good are very good and even the wisest have trouble getting out of their traps.
The ones that are good have gotten that way because with luck and times they succeeded in collecting many experiences. Because of this they have a lot to draw on when trying to get people to live out stories. However like their less skill brethren, they lack true creativity so cannot fully account for everything a specific individual will do.
Faeries are known to work together in order to recreate a bigger experience then they could do alone. For example a three faeries could work together as a team to recreate a dragon slaying adventure. One faerie manifests as a wise old man seeking a hero, the second as a dragon slaying sword, and the third as the dragon itself. Together they try to get some unsuspecting person to recreate the quest to kill the dragon.
Faeries have found that there different flavor of experiences with different trade offs. For example a monstrous faerie can have a big feeding by terrorizing a village but it is fleeting and runs the risk of somebody trying to destroy the faerie creature. A house fairy may only feed a little each day by repairing small items but the gratitude of the owners is long lasting.
The existence of the Seelie and Unseelie court is largely based on what type of experiences of their respective members specializes in.
Faeries can be sentient, animal, and non-sentient.
Non sentient faeries can manifest as a place or environment that causes an intense experience. Think of haunted house that really creeps you out. In a fantasy setting, this could be the work of a non-sentient faerie.
Non sentient faeries can manifest as an object that causes an intense experience. For example the dragon slaying sword mentioned above. Of course if unfortunate individual happen to encounter a real dragon then there will a problem as it not a real dragon slaying sword. Or it might not as the faerie manifesting as a sword happen to be powerful enough to take on a dragon. This inconsistency is why dealing with faeries is so maddeningly difficult.
Sentient faeries are the most dangerous as they are capable of recreating sophisticated and complex experiences. They are also capable of learning by collecting new experiences to add their palette.
The purpose of this exercise is for me to generate interesting situations involving faeries. By having an underlying "reason" I can use it as a template to develop what the players will deal with. It also also for the players to master faeries by making what they are discover-able. Although in this particular case it doesn't make it much easier because you still have to figure out what a faerie is actually trying to recreate before you can truly defeat it.
Hope you find this useful for your own campaigns.