The first Deep Ones were created by the Antarctic Elder Things millions of years ago as a byproduct of immortality experiments on terrestrial lifeforms, most were destroyed but some escaped into the wild and multiplied. This explains the Deep Ones unnatural longevity and their genetically programmed aversion to the Elder Sign.
Dagon and Hydra were part of this "first batch" and so they are tens of millions of years old, huge, vastly intelligent, and have who knows what kinds of mutations. There may be others of the "first batch" in suspended animation in the undersea ruins of Elder Thing cities.
Deep Ones breed among themselves but it rarely produces viable offspring (otherwise the ocean would be teeming with immortal Deep Ones). Due to their unnatural nature they can breed with many other forms of life often producing the strange oceanic horrors of legend but their preferred breeding stock has always been humans because the offspring is intelligent and generally transforms into something very similar to to a pure Deep One. In eons past Deep Ones bred with various primitive hominids but the results were not acceptable to their ideas of racial aesthetics and generally destroyed, that said there are probably remote clans of apelike Deep Ones still out there somewhere.
Shortly after their escape from the Elder Things, Dagon and the other first batch Deep Ones fled to the area around sunken Rlyeh because the Elder Things avoided it, feral Shoggoths also dwelt in the area for the same reason and so an alliance was formed, over time the Deep Ones learned of the shoggoths vulnerability to hypnotic suggestion and began to exploit it. The shoggoths are not complete slaves to the Deep Ones but they generally are easily manipulated by hypnotic suggestions and a reverence for Dagon.
Dagon, the Deep Ones, and their allied shoggoths worship Cthulhu. Although Cthulhu's telepathic emanations are blocked by water being in close proximity to Cthulhu's tomb and the surrounding monuments holding theGreat Old Ones mental emanations allowed Dagon to make mental contact with him on some level. During the brief times when Rlyeh was temporarily thrust above the water Dagon spoke directly to his master gaining even more occult knowledge and becoming more devoted.
Over time the Elder Things died out and the Deep Ones could safely leave the Rlyeh "reservation" and they established cities based on the ruins of many of the Elder Thing cities. But Rlyeh is a holy place to the Deep Ones and they often make pilgrimages to the sunken city hoping to sense the presence of their lord and master.
