Muspelheim is one of the worlds for which we have very few sources. We find it mentioned only once in the Poetic Edda (Lokasenna) and then a few more times in the Prose Edda where it plays an important role in the Creation Myth. According to these sources Muspelheim is a world of fire inhabited by a Giant called Surtr (the black One) who guards it with his fiery sword. Surtr shows up in four additional poems in the Poetic Edda, namely in Völuspa, Vafthrudnismal, Svipdagsmal and Fafnismal, where he is mentioned in relation to his role at Ragnarök.
According to Snorri’s creation Myth in the Prose Edda, Muspelheim is the first world that comes into existence. It can only be entered by the ones that were born there, namely Surtr and his unnamed brothers, and is the primordial source of energy in the Universe. When Odin and his brother re-order the Universe after slaying Ymir, they use sparks flying out of Muspelheim in order to create the sun and the stars. So the fires of Muspel are the source of all life as they create the first being when interacting with their icy counterparts that flow out of Niflheim in the creation Myth. The Universe that comes into existence through this interaction is very chaotic and hostile to most forms of life though. There are no cycles in this world, which means that there is no time and no order, so it is a chaotic, undifferentiated and primordial place. Once its energy is channeled into a regulated form by Odin and his brothers, the Universe as the Germanic Peoples imagined it comes into existence. This version allows for multitudes of different kinds of plants, animals, people and other beings to thrive until the flames will swallow it all up again at Ragnarök.
So Muspelheim was probably seen as the source of all energy in the Universe. In an uncontrolled form this energy could induce creative processes but the results of these were very chaotic and therefore didn’t allow for a great diversity of lifeforms nor for much consciousness to arise. Once channeled properly this changed and life could flourish in all its glory but only for a while as this boundless energy simply can’t be contained forever. At some point it will suddenly expand and Surtr will swing his flaming sword, returning the Universe to its original, inert state and the whole cycle starts all over again.