"It's fantasy, so it doesn't need to make sense" is a terrible attitude. It basically means you eat everything up that is served to you.
It's a fantasy world filled with people. The world can have its quirks, but the people need to make sense
"Swords don't get used anymore, because we are at peace and magic is more effective" is a stupid premise. This applies to real life, and swords are still fucking cool.
It's also weird that the dwarf could just break that sword in half. I know It's for setting up the explanation and showing that...