I tend to think of it as the personal story and dungeons are the main thread of the hero's lore while the DE's are the ongoing battles. The hero, you, has this ongoing epic quest to save the world. This is your overriding goal but there is nothing to stop you from fending off a random bandit invasion because you were in the area. If you pass it by then the village is destroyed and its a footnote in history. Alternatively you could save the village and again that's a footnote as one of your heroic exploits while accomplishing your quest. Reguardless of if the hero gets involved or not the war still rages accross the land and the consequences are felt in the time that follows.
I think the best thing about the way DE's work is that the world goes on and evolves even when you are not there. The hero of the story can not be everywhere and save everybody at once. Well he can if omnipresent time traveling powers are one of his skills but lets asume they are not. Events happen that mater to someone but may or may not even be noticed by a specific hero untill much later. Yet those events change the world in profound ways that can impact a player later, this makes it a living world. On the other side of a coin you've got the wow style of quests and world. Its all static, only changeing when the hero compleats the quest. Effectivly you can be everywhere and do everything because every event waits for the hero to show up and compleat them.
SKyrim is only a partial analogy as the world is still static. Oh the NPC's have schedules so they move around but if one NPC is destined to be assasinated by the dark brotherhood it wont happen till the player triggers that event. The world is prety much static any time the player is not nearby manipulating events, they just wait till a player shows up to drive the world. If skyrim had DE's you'd have situations where the war between the stormcloaks and imperials advanced while you were away questing and towns would change hands in your absence.