The nice thing about fantasy races is that they give character creation choices with a good degree of granularity and comprehensibility and are a neat way to pull folkloric material into your game. The bad thing about them is that they mean that race science (that is, the false belief that races as understood by society correspond to biologically distinct types of human beings) is true in your fantasy world.
Honestly, the bad part is bad enough to completely sink the goodness of the good part.
This is another in my ongoing struggle to formulate different fantasy folk in a way that isn't race science, but emphasizing the ways that real people saw themselves and others, particularly before the race-scientific idea became prominent in the modern era.
The problem with making things nuanced is that also makes them complicated; race science is conceptually pretty straightforward, which makes it very game-able. Trying to embed fantasy folk in a realistically nuanced web of relationships with each other also buries the conceptual clarity of a player looking at the list of options and saying, "I'm going to play an elf, that means I live in the woods and don't particularly like dwarfs." One runs the risk of overloading the player with world-building, particularly if one chooses to foreground linguistic groups which are among the more salient in-universe distinctions between peoples.
I'm far from a solution to this, but my current idea is to use somewhat-transparent names for languages (or groups of languages) wherever possible, and doing as little "hard" worldbuilding as possible to keep things relatively setting-neutral, while still keeping things complex enough to stop collapsing into the fail state of race science. It's a tall order, let's see how I do.
When making a character, you must choose a people for them to belong to (or at least stem from). A people is defined by a language, a way of life and an alignment, all of which affect how they see themselves and the world.
To make this your own, you only have to identify the peoples in your setting, their languages, ways of life and alignments. You may choose to give every people a distinct ethnonym; I'm not doing this so as not to overload a player with unfamiliar names. Instead, I'm going to organize peoples by language family, grouping setting languages together into four groups (middling, rhuno-buggish, sylvene and foreigner), the first three of which correspond to actual language families. Each family contains a number of peoples with different ways of life and dramatically different outlooks on the world and their place in it.