It seems that the blindfold was intended to be an item at some point. In early dev builds, the arena armor was split into three parts. Unused content found in the game's second expansion pack.
In the Shivering Isles expansion, the Hero ends up in Sheogorath's realm in Oblivion, where he learns about the Daedric Prince's past. In the Knights of the Nine expansion, the Hero learns about the titular faction, that wants to obtain certain relics that can stop Umaril, a man who seeks revenge on the Nine Divines. Before his death, however, Uriel gives an Amulet of Kings to the player character, who is asked to stop the realm of Oblivion from taking over Tamriel. In The Elder Scrolls IV: Oblivion, Tom Cruise Uriel Septim VII is assassinated by the Mythic Dawn.