I would like to address two subjects:
1. Why did Karzahni go insane?
2. Concerning the elemental gods.
1: Why did Karzahni go insane?
I see his power of seeing alternate futures as projections of the possible future based on the information he has, much like how we make weather models. He was more than capable of controlling his powers until one fateful day that all changed. Ekimu, upon giving the Matoran sentience, consequently caused the possibilities of alternate futures to be nearly endless. Karzahni, unable to process all the information, slowly began to lose his mind. He started to lash out and cause destruction upon the island. Ekimu and Makuta, seeing the madness that had overtaken their brother, designed a place to restrain him and keep him safe with the intention of releasing him after they found a way to restore him.
Following these events, the two brothers looked to the island and found the Matoran fighting and killing for resources. Makuta came to the conclusion that sentience was a curse and went out to end their misery. Ekimu pleaded with his brother and Makuta did not kill them but instead they created guardians to watch over them and agreed not to give any other creatures, besides these, sentience.
All was well until the devices of Karzahni began to play out. A seventh tribe appeared to the west and they migrated to the island. The unguilded tribe began to kill the other Matoran for being different and the other tribes retaliated. The guardians stepped in and drove off the mysterious tribe but it was too late, the damage had been done. Makuta had witnessed the happenings and believed Ekimu had broken their agreement. He then proceeded to go and carry out the task he had set out to do before but was confronted by Ekimu. The brothers battled upon the island shaking its very foundations. The guardians seeing the brothers were going to destroy the island in their battle, decided that they had to stop them and did so.
During the battle between the two brothers, Karzahni's "prison" had collapsed into the sea and took water. The prison, designed to keep Karzahni alive, adapted him to survive the conditions. His bonds remained unbroken in the fall however, so he is only able to reach out with his mind...
2: Concerning the elemental gods.
I personally still believe the elemental gods should come before the Matoran.
Having Makuta mad at Ekimu for giving sentience to the Matoran seems to be directly undermined by the idea of them creating even more powerful god like beings with sentience right after. The elemental gods are over qualified and powered to fill the position of being guardians. The role could just as easily be filled by beings less powerful than the Toa and would be more likely to be made, due to their inability to overthrow the brothers.
Having the elemental gods around before the Matoran allows them to be directly connected to the management of their respective elements in the creation of the island and could be seen as a higher tier of being that the brothers are fine with having sentience. This also allows us to already have the Toas' elemental source without it sounding too contrived.
We could also have the elemental gods be separate from the creations of the brothers. They could be life forces captured by the brothers to help them create the island and or Matoran.
Thoughts, ideas, comments, and constructive criticism welcome.