The Realm of Chaos, sometimes known as the Aethyr, or the Chaos Wastes (Though this is mainly used to refer to the Winds of Magic) or (particularly in Warhammer 40,000) the Warp is the source of the Winds of Magic, and has been variously described as another dimension, another plane of existence, another universe and a parallel universe.
The Realm of Chaos is a place of pure Chaos energy, what is described as magic by the inhabitants of the Warhammer World. As this energy is the raw stuff of another dimension, it has no need to conform to the physical laws of our world, the forces gravity, time, and laws of thermodynamics and motion for instance, do not apply to it. As such, anything that comes into contact with this Chaos energy distorts mutates into a form unnatural to this world. Humans and Trolls are particularly susceptible to this energy and may sprout extra limbs and other mutations if they come into contact with a large amount of chaos energy. The Skaven race was formed when common rats came into contact with Chaos energy. Dwarfs, Elves and particularly Greenskins are known to be highly resistant to this mutating force.
The thoughts, dreams, emotions and desires of mortal beings influence the Aethyr, creating eddies and currents in the warp. Some of these eddies coalesce into sentient beings which can think independently, among these are the Chaos Gods, the Elven Gods, and all Daemons. As no being can exist outside of the physical laws of universe it is from, Daemons can only manifest themselves physically in the Warhammer World in areas with a high concentration of Chaos energy, such as the Chaos Wastes. Because these entities are formed from thoughts they take on the qualities of those thoughts, for instance Khorne was formed from the mortal emotion of anger.
At the north and south poles of the Warhammer World lie two great Warp Gates or Chaos Gates which act as portals between the world and the Realm of Chaos. These gates were created by enigmatic and powerful beings called the Old Ones in the ancient past to serve as methods of travel between this and other worlds. At some point the gates collapsed or malfunctioned and allowed the raw energy of Chaos into the world, (at which point the Old Ones disappeared) this is how the wizards and mages of the Warhammer World use magic, by manipulating and refining this Chaos energy. At first, when the Chaos gates collapsed the world was flooded with a huge amount of Chaos energy, Daemons could manifest in almost any location they pleased, however an Elven mage called Caledor Dragontamer devised a scheme to set up Menhir Stones around the isle of Ulthuan which drained away and siphoned off the Chaos energy until it was at a much lower level in the habitable areas of the world. The Chaos Wastes still remain highly saturated with Chaos energy though.