|The Endless Caverns remain unseen so here is the Glittering Caves by Ted Nasmith|
Here is an idea I had a few years ago for a D&D campaign set in the east of Middle-earth:
The party would start out in Lake Town, Dale or Dorwinion down the river on the inland sea where wine is made, and could travel between these towns. The time would be after the Battle of the Five Armies, when Dale has been rebuilt, and wood elves and dwarves from might be welcome in the human towns. Tooks from the Shire might turn up occasionally. And perhaps even a lawful werebear. The party could explore the surrounding locations - Withered Heath, Mirkwood, Lonely Mountain. They might search for the remains of the Master and his stolen dragon gold.
Eventually they would find rumors or a map of The Endless Caverns of Tu far to the East. Anything might be put between since Tolkien left it mostly undescribed. They might travel through the Last Desert to the East of East, avoiding wild Were-worms.
What I am calling The Endless Caverns of Tu is described in the first volume of Tolkien's Book of Lost Tales, his earliest writings. A section called Gilfanon's Tale describes the Awakening of Elves and Men in the East. It's fragmentary but full of fascinating details, and was never re-written, so could be considered to stand in later writings. In this there is a brief mention of Tu the wizard and his dwelling:
"Now the tale tells of a certain fay and names him Tu the wizard, for he was more skilled in magics than any that have ever yet dwelt beyond the land of Valinor; and wondering about the world he found the elves and he drew them to him and taught them many deep things, and he became as a mighty king among, and their tales name him the Lord of Gloaming and all the fairies of his land Hisildi or twilight people. Now the places about Koivie-neni the Waters of Awakening are rugged and full of mighty rocks, and the stream that feeds that water falls therein down a deep cleft ... a pale and slender thread, but the issue of the dark lake was beneath the earth into many endless caverns falling very more deeply into the bosom of the world. There was the dwelling of Tu the wizard, and fathomless hollow are those places, but their doors have long been sealed and none know now the entry."
The "many endless caverns falling very more deeply into the bosom of the world" brings to mind the many-leveled Underworld of D&D.
A later outline states that:
"Men grew in stature, and gathered knowledge from the Dark Elves, but Tu faded before the Sun and hid in the bottomless caverns. Men dwelt in the centre of the world and spread thence in all directions; an a very great age passed".
So Tu and his caverns might still exist deep in the earth at the time of the Hobbit.
Tu could be a lich, Maia (mad demigod?), or an ancient non-human archmage hiding deep in The Underworld. In the places where Balrogs hide and the Watcher in the Water came from...
"Something has crept or been driven out of the dark water under the mountains. There are older and fouler things than orcs in the deep places of the world" (Gandalf in LOTR).
(adapted from my posts in this OD&D thread a few years ago)