Dermoid arises from -
Dermoids or benign cystic teratomas are derived from the ectodennal differentiation of totipotent cells.
Some characteristic features of Dermoids or Benign Cystic teratomas 

They are a common neoplasm of the ovary with bilaterally seen in 10-15% of cases.
Characteristically, they are unilocular cysts containing hair and cheesy sebaceous material.
the internal lining of cyst is mostly smooth but frequently has a knob-like nodular protrusion in one area (the umbo) in which cartilage, bone and well formed teethi may be present.
On histological examination, the cyst wall is composed of stratified squamous epithelium with underlying sebaceous glands, hair shafts and other skin adnexal structures.
Rarely ovarian teratomas are composed almost entirely of thyroid tissue k/a struma ovarii
About 1% of dermoids undergo malignant transformation of any one of the component elements (eg. thyroid ca, melanoma but most commonly, squamous cell ca)
Pluripotent cell
Totipotent cell
Ectoderm
Mesoderm