I'd always liked to think that the demons were servants of Armok, cast into the underworld, and sealed behind and admantium barrier, before the dawn of history, by the other gods. In the centuries that they've been buried, the vile images that you see on the walls are all they've managed to do, to the walls of their prison.
If all the HFS are connected, then the underworld will still apprecaite new exits in additon to the first one you create. Though where they get victems, before the first pit is breached, is an interesting quetion.
The most obvious guess is that they are the damned, cast into the underworld for some terrible misdeeds, but perhaps they are the mortal champions of Armok, from the wars at the time of creation, and they died in prison.
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Dwarves under the influence of demons don't have to work up to setting traps and other complicated stuff.
They could just go mad and start attacking people at random intervals.
Figuring out which dwarves are just cranky, and which ones are struggling with dark powers within, would be a Fun activity.
Dwarves wouldn't neccisarily have to be able to tell the difference at all. A prison full of snarling madmen would be a cool after effect, for when the more martial challenges of the pits are overcome. Not only does it expand the prison building aspect, but having a bunch of posessed lunatics lying around is a great hook for gameplay and story alike.
Some of the posessed should be strong enough to break out of chains, just for the sake of tradition.
Dwarves with strong winds and souls should be able to resist posession, and supress their demons, if they do get posessed. Not only is this pretty logical, it makes selecting candidates for advanced military training a little deeper. You don't just want as many champions as you can train, becasue a weak minded super soldier can become a liability, when you most need him as an asset.