Discord is an immortal Spirit of Chaos that has survived from unknown antiquity until the modern era.
His physical body is trapped inside the Blue Rainbow with the Windigos, thus he cannot interact with the world directly. His only capacity to affect the world comes from his ability to project his consciousness onto ponies that have "died" (had their hearts stop beating). Lozenge is one such pony.
He narrates part of the original novel by (through literary device) 'manipulating' what the reader is reading.