Both of you are partially right. Goblins were actually originally created by Mimiron who experimented on a race of primitives by feeding them Kaja'mite ore. It turned them into a vastly intelligent race that rivaled the Gnomes. Then after the sundering they were cut off from their source of Kaja'mite and regressed into a primitive race and were enslaved by the Trolls who used them to mine Kaja'mite which restored their intelligence allowing them to overthrow them.
Now because of their greed and overuse of Kaja'mite they are running low on the resource and have regressed and are not at peak intelligence, that's why they only make stupid bombs and things now.