We can see once again that the interior of the dungeon is bigger on the insides as it is on the outsides, being big enough to contain distant mountains. The Winged Lion merges all of the monsters together in Marcilles army (except the Quetzacouatl, which is still circling above the island), and turns into a colossal kaiju-sized monstrousity big enough to swallow a large stone tower whole.
Laios replaces Marcille as the Lord of the Dungeon, and he wishes for the Winged Lion and the other demons to not meddle with humans ('humans' meaning all sorts of people, tallmen, elves, dwarves, etc). However, the Winged Lion is able to worm his way around this, by seeing the truest desire of Laios; to become the ultimate monster. In return, the Winged Lion takes possession of Laios' body, while Laios turns into a colossal monster which he imagined.
We learn the history of the demon(s). The original entities which would later become known as demons had no will or thoughts of their own, and existed only as tiny specks. These specks began interacting with the insects, and attached to them, and eventually, began to feed on the insects desires. There's also what may be a 4th wall break here; an insect is thinking how it wants to eat, and the demon devours the thought/speech bubble. The demons eventually discover people (and vice versa). However, the demon(s) cannot keep their source of food alive, as once they devour their souls they're gone.
Humans lock the demons into dungeons to prevent them from freely using their magic. However, the demon(s) will still grant wishes to anyone who reaches them/it at the bottom of the dungeon. One day, a man wished for the demon to destroy the world, which the demon obliged (in this context, meaning wipe out all civilization on the surface). The demon(s) began to starve, but eventually, survivors returned, and the demon(s) learned how next time better to cultivate the desires of people to feast on them forever.
Demons are noted to be organs of the power from the infinite world designed to understand the language of magic. Demons have formed from human desires, so they only understand what humans are telling them as opposed to when they first arrives (although, it still is possible that there are demons for other species).
When in Laios' body, the Winged Lion regenerates from having his/its head cut off by Izutsumi and blasted by a fire explosion by Marcille, which only annoys him/it (they even note how the Laos demon isn't even scratched). Mithrun is able to physically force the Laios demon to the ground however. Demon Laios is able to freeze everyone except Laios' party in time, and when he/it reaches the surface, the Laios Demon uses one finger to split open the sky, causing hands from the world of infinity to start dragging people away to feast on their desires forever (the only exception being Laios' party, as that was part of Laios' wish).
The Ultimate Strongest Monster is (with the possible exception of the monster mentioned in the monster tales that Sissel created, but starved as it required 3 blue whale souls every half an hour to survive) the most powerful monster in the series, being 100m tall, capable of flying around 300km/h, it's poop forming forests and more. It's claws penetrate Demon Laios, and even after being swallowed whole by the Quetzacouatl, it slices the great wyrm open from the insides.
In response, the Laios Demon starts duplicating endlessly and attacking the Ultimate Strongest Monster, while the Ultimate Strongest Monster starts eating all the Demon Laios'. It seems that the demon will win. However, Laios has made a final update to his ultimate monster (which may or may not have been part of the plan to defeat the Winged Lion); the Ultimate Strongest Monster has the power to eat desires.
Laios eats the Winged Lions appetite (the first thing it ever gained in the finite world), and as such, the demon(s) begin to fade from the finite world. Before it disappears though, the Winged Lion curses Laios, saying that his greatest desire (to rescue Falin) will never be granted...