The Silmarils (or Silmarili in the proper Quenya plural) are three brilliant gemstones crafted by Fëanor in Aman. They are clear as diamond and hard enough to withstand any violence done to them in Arda. Within them is caught the light of the Two Trees of Valinor, Laurelin and Telperion. The gems were marvels even in the land of the Valar, and they were hallowed by Varda herself so that they would burn any evildoers who touched them.
The Silmarils were kept in the treasury of the Ñoldor at Formenos after Fëanor was exiled there for a time. When the Darkening of Valinor came, the Trees were destroyed by Morgoth and Ungoliant who then fled north towards Formenos, where Morgoth slew Finwë, Fëanor's father and High King of the Noldor, and stole many of the Ñoldor's gems, including the Silmarils. Though many of the gemstones were swallowed by Ungoliant when she and Morgoth escaped back to the north of Middle-earth, Morgoth withheld the Silmarils and later set them into his crown. Yavanna, the Valië who created the Trees, asked Fëanor to unlock the Silmarils, that she might use the remaining light within them to save the Trees, but Fëanor refused her. Doing so would destroy the Silmarils, and much as Yavanna would never make anything equal to Laurelin and Telperion, Fëanor would never be able to duplicate the creation of the Silmarils.
Fëanor led many of the Ñoldor after Morgoth in pursuit of vengeance and his Silmarils, binding himself and his sons to a terrible Oath to reclaim the gems at all costs, but the first Silmaril was reclaimed not by any of the Ñoldor but by Beren and Lúthien, a mortal Man and the half-Maia Sindar princess of Doriath. They went into Angband itself, Morgoth's fortress, and cut one of the gems from Morgoth's crown. This Silmaril was kept by Thingol, Lúthien's father, until Menegroth was sacked and Thingol slain. The Silmaril was returned to Lúthien where she and Beren dwelt to the south of the forests of Doriath, and after their deaths it was passed to their son Dior.
The sons of Fëanor, when they learned of this, demanded the Silmaril's return and were refused. The Second Kinslaying followed and Doriath was fully laid waste, but the Silmaril was not reclaimed by the sons of Fëanor. It instead went with Elwing, Dior's daughter, to the Havens of Sirion on the sea. The surviving sons of Fëanor again demanded the Silmaril and were again denied, and again attacked. Elwing refused to yield the Silmaril and instead leapt into the sea. She was transformed into a seabird by Ulmo and flew to join her husband Eärendil on his ship. Together they sailed to Valinor with the Silmaril to beg aid from the Valar against Morgoth, whose hosts were quickly overrunning Beleriand (a separate and perhaps more dire problem than the repeated Kinslayings). Eärendil's ship was made a vessel for the Silmaril and blessed by the Valar, and now he sails across the sky as the brightest star.
The last two Silmarils were not recovered until the War of Wrath, spurred by Eärendil and Elwing's plea. The last two surviving sons of Fëanor stole into the camp of the host of the Valar at the end of the war and stole the Silmarils, but after the repeated Kinslayings they were now burned by their father's creations. Maedhros cast one into a chasm of fire with himself, and Maglor cast the other into the sea.