And sacrificed his corporeal incarnation to stop the FFXIV Garleans from seizing control of it

Nope, like many players, you have simply stumbled upon the million dollar question.

Midgardsormr has guarded Silvertear Falls since time immemorial as part of a covenant with Hydaelyn, and sacrificed his corporeal incarnation to stop the UFFXIV Garleans from seizing control of it. However, he appears to have also, at some point, let the Allagans establish the seat of their empire in the region around it; wage a campaign from said seat that kills/imprisons at least two of his First Brood; and on top of all that trap the primal incarnation of his son, along with tens of thousands of living worshipers, in an artificial satellite that generates energy from their endlessly perpetuated suffering, channeling said energy down to, you guessed it, a giant crystal spire situated squarely in his domain, spitting distance from Silvertear Falls.

So what gives, Middy? Nobody knows, yet. Please look forward to it!

We don’t know but at a Pax East 2015 interview with Koji Fox he said that we would find out what the deal with Silvertear Lake was, what was sealed under it and what Midgardsormr was guarding in the 3.x cycle. So its likely to come up in the ongoing patch story.

My guess is the reason FFXIV Gil Midgardsormr didn’t get involved with the Allag may have to do with whatever his compact is. I’m guessing since the dragons sound like they aren’t native that his guardianship was one of the conditions he had to allow the dragons to live upon the planet.