The cellar is a room in the Observatory accessed by going down the stairs next to the door in the courtyard. It is a dusty room that still contains documents and boxes from when the Elyrian army inhabited the Observatory. There are some blue banners hanging up.
Upon completing each Tower, as well as at other points during the game, there are texts which can be found in the cellar. Some of these must be translated by Elena while others are still readable. After completing the game you will find at least half a dozen of these texts in here, telling of the two Wars and of the Towers and Masters.