Satire in Candide
Voltaire, a Frenchman, spent several years in the court of Frederick of Prussia, socializing with noble Germans, Prussians, and Russians. He would've been familiar with German names and cities like the fictional Waldberghofftrarbk-dikdorff, with which he pokes fun at the complex and consonant-heavy German language.
Note that this is the first we've heard of this handsome sword. Unlike other writers, Voltaire doesn't bother to establish facts ahead of time, instead presenting them as necessary when he needs to get his main characters out of trouble. This style of writing has the effect of rendering the story in many ways unbelievable, which only enhances the comedic aspects of Voltaire's satire.
Voltaire uses this comically long name to make fun of Spaniards and their descendants, who often have uncommonly long names, such as Pablo Diego José Francisco de Paula Juan Nepomuceno María de los Remedios Cipriano de la Santísima Trinidad Ruiz y Picasso, the birth name of famed Spanish painter Pablo Picasso.
Voltaire positions Paraguay as a kind of Utopia, suggesting that its theocratic or religious rule is superior to the monarchial rule of Spain and Portugal. Given the satirical nature of the book, however, we can be sure that Voltaire is using this hyperbole to undercut the idea of Utopia, and that Paraguay will prove to be anything but.