Yume no Kochō

The is a mystical entity with unique abilities that control and manipulate its victim's ability to sleep, have any dreams, and even personal memories to be transferred to another individual of whom one has a strong and close family connection with, if unknown to the one who receives its curse. It seems to have an opposing spiritual force: The Grim Butterfly!

History
After Homura set the forest fire by Zero, Jaken have to break the curse, but the silver-scale is spreading. The Spirit of the Tree of Ages as arrived that she tells him Towa traveled across time to the other world. She gave him the Dream Butterfly chrysalis and tells him to attach it to someone who is close to Rin and grow the Dream Butterfly. If he use the Butterfly to keep giving her sleep and dreams, Rin will continue to sleep and dream. That will stop her time and the curse down. As Setsuna was crying for the lost of her twin sister Towa, Jaken secretly had added the Dream Butterfly chrysalis on Setsuna's neck since Zero put the silver-scale curse on Rin so it would slow down the curse. Setsuna was cursed by the Dream Butterfly to be unable to sleep or dream and had her memories of her early girlhood erased, including of her elder twin sister, Towa. Now, Towa, Setsuna and Moroha go on a quest to capture the Dream Butterfly and undo Setsuna's decade-year curse.

It was later seen circling a comatose eighteen-year-old looking Rin deep within the Sacred Tree of Ages' depths, as its once dormant essence observes her with a silent Sesshōmaru nearby.

On the night of the New Moon, Towa spotted the Dream Butterfly from her dream and tried to catch it, but it had again vanished, leading her to the Forest of the Tree of Ages (formerly known as "Inuyasha's Forest" due his own fifty-year long suspended state, both due to the Sacred Tree of Ages time-ceasing ability and the late Kikyō's Sealing Arrow).

When Setsuna had been murdered by Kirinmaru, she started to get a little sleepy that she gets her dreams and memories are coming back that the curse has been briefly broken, she even calls Towa "Sis", as the Dream Butterfly returns to her head as her final words, "Good night Sis".

After Setsuna was killed, Towa saw the Dream Butterfly again in a vision, while she was trying to use the broken Tenseiga to return Setsuna to life.

The Dream Butterfly returned to the Sacred Tree and placed the dreams onto the slumbering Rin.

The other Dream Butterfly have arrived Kirinmaru's ship to him and let Kirinmaru to dream as it leave to Mount Musubi, as it lands on his daughter Rion to awakened that Moroha arrived first.

Since Setsuna cuts the between Rion and Kirinmaru, it caused another Dream Butterfly of Mount Musubi to be destroyed. Sesshōmaru use the Tenseiga as the Dream Butterfly came out of Setsuna as she sees it for the first time along with Rion. Jaken tells them about their mother Rin have the sliver-scale curse, and Sesshōmaru tells Setsuna that if he cut it she'll sleep again, but in return their mother will be covered by the curse again and then die. He asked what do she want, she answered that her choice is that she must save her mother, and he used the Tenseiga to cut the Dream Butterfly that it causes to stop dreaming and the curse to continues.

One month later, the ailing Rin had presented it to Setsuna, in the form of a small orb of yellow light, so she could give it to Towa and thus help her snap out her demonic fury and hatred that Zero had helped bring forth. Setsuna had then showed it to the demonic Towa, which contained a memory of their girlhood that had been locked away per Rin's request. Having fulfilled its purpose, it disappeared, returning to Mount Musubi.

Physical Description
The Butterfly of Dreams is unique compared to normal butterfly, not only for its colors but the black "tails" extending from its lower wings. The upper wings are outlined black with colors of indigo and deep pink like tips of the "tails" while the lower wings are black with pale pink. The body is red, black and gray while the eyes are green.

In the second season's premiere, the Dream Butterfly's true form and colors are finally revealed: A cream, yellow, aquamarine and green hue as opposed to black, indigo, deep and pale pink. This could be a reference to it cursing young Setsuna after it began transferring her sleep and girlhood memories to ensure the safety of her teenage mother from the ever-escalating fatal curse that had been placed on her by giving her the very dreams and ability to sleep of her youngest twin daughter, Setsuna, to a slumbering Rin. Also its body is aquamarine, white and magenta while the eyes are red.

In "The Barrier of Mount Musubi", the Dream Butterfly's other version at Mount Musubi was purple, pale and red different than the regular Dream Butterfly from within Setsuna. Also its body is yellow, black and grey while the eyes are green.

In its final appearance, the Dream Butterfly was a glittering pale blue as a memory of the four-year-old Setsuna it had sealed for a whole decade was finally brought to light at the behest of Rin. It is what ultimately led the half-demon twins to finally reconcile since Towa's return to the feudal era many months ago. Having fulfilled its purpose, it vanishes presumably returning to Mount Musubi.

Powers & Abilities

 * Curse of Sleeplessness & Dreams: The Yume no Kochō has the unique ability to curse its victims by "eating and absorbing their dreams and memories", taking away their ability to sleep and even also prevent hanyō losing their demonic energy during their period of vulnerability.
 * Dream World Passage: The Yume no Kochō landing on the mark of the Sacred Tree of Ages, since Kikyō had shot Inuyasha, has the power to enter and exit the immaterial world of dreams as it sees fit.
 * Sleep Deprivation/Insomnia: The Dream Butterfly makes Setsuna can neither fall asleep nor have dreams. This resulted in her childhood memories falling to total amnesia. It's implied even modern era sleep medicine can't do anything for her; despite there existing pretty strong medication to induce sleep. Despite this, the condition has given Setsuna several advantages. She is immune to sleep inducing spells as well as the New Moon weakness of other hanyōs. Being unable to sleep also allows her to stay alert in the warring age.
 * Memory Absorption and Sealing: At the behest of Rin, to whom it was used to save from death, it had taken away Setsuna's girlhood memories of her beloved twin sister Towa to spare the young half-demon the deep sorrow of being separated from Towa for a whole decade. Therefore, the memories remained in the possession of Rin until she had made the decision to return it to her youngest twin daughter.

Weaknesses

 * Yukari no Tachikiri: Setsuna uses her upgraded naginata's supreme demonic power to see and cut the invisible red thread of fate between the undead Rion and her overprotective father Kirinmaru that caused her own Dream Butterfly to be cut down, therefore neutralizing its effects fully.
 * Tenseiga: Sesshōmaru uses the Tenseiga to cut it, being not of the physical world, to return Setsuna's ability to sleep to her. As it is of a spirit nature, the healing blade is able to make contact with its immaterial form.