Episode 3 (Hanyō no Yashahime)

The Dream Butterfly is the third episode of Hanyō no Yashahime.

Synopsis

 * 1) After liberating her adoptive family from an ever-growing gang of bullies, Towa must now defend them from a demon brought from the past. She is aided by the newly-arrived Moroha and Setsuna, and her own growing power.
 * 2) Before they can recover, another demon possesses Towa and pits her against Setsuna. The Higurashis are put in further danger until Moroha convinces Setsuna to deal with the threat more thoughtfully.
 * 3) Towa learns from Moroha how Setsuna has forgotten her own sister, and vows to recover her happy memories and dreams.

Summary
In the modern era, Moroha tells Towa that her sword broke because it was ordinary, but Towa manages to use the Silver Rainbow Pearl's power to convert the remains into a laser blade and damage Mistress Three-Eyes. Setsuna finishes her off with her weapon and she and Moroha recover their Rainbow Pearls. Moroha claims Mistress Three-Eyes' skull as a trophy and Towa tries to get reacquainted with her twin sister, but Setsuna does not remember her and rejects her. Moroha deduces that the two are the daughters of Sesshōmaru, but neither of them know who that is.

In the Feudal era, Kaede tells Hisui and Kohaku that Setsuna is Sesshōmaru's daughter. When Setsuna and Towa were newly born, Sesshōmaru took them away from the village. A few years later, Setsuna returned to the village alone. Hisui and Kohaku found Root Head's roots around the Tree of Ages and deduce that Setsuna and Moroha were sent to the future.

Meanwhile, а minor demon called Hitokon possesses Towa and has her attack Setsuna. After a brief fight, Hitokon jumps into the body of Towa's adoptive sister, Mei, but Setsuna exorcises it. Mei with her parents allows Setsuna and Moroha to stay with them. Sota and Moe also recognize Moroha as Kagome's daughter. As Mei gushes about how cool Towa, Setsuna, and Moroha are, Moroha takes a shower and embarrasses them when she steps out of the bathroom naked without a care, marveling at how she had never bathed with hot water before. Moroha deduces that Setsuna was cursed by the Dream Butterfly to be unable to sleep or dream and had her memories of her past erased. Towa is struck with guilt, believing she could have prevented this if she did not get separated from her ten years ago.

Trivia

 * Kaede reveals that the Bone-Eater's Well stopped working over 20 years ago. Since this well stopped working after the final return of Kagome Higurashi to the Feudal era, this means that Hisui must now be 20 years old.
 * The episode reveals that Moroha somehow knows about Sesshōmaru's paternity, but has no idea that he is her half-uncle, Inuyasha and Kagome are her parents, and Towa and Setsuna are her half-cousins. The twins also don't have information about their roots for unknown reasons, and Towa didn't even know the term "half-demon" until this day.
 * It turns out that Setsuna has completely forgot her past after the mysterious fire that separated her from Towa. Moroha also reveals that her half-cousin is under the curse of the Dream Butterfly that has consumed Setsuna's dreams and taken away her ability to sleep. However, it is not yet known whether these two events happened to Setsuna at the same time or not.
 * The origin of the Bone-Eater's Well is revealed, it was made from the wood of the Sacred Tree. That's why this well once have allowed time travel. This is also the first time this has been confirmed in the anime from the franchise's creator, as this information about the well was previously only reported in the first InuYasha movie.
 * Kohaku reveals that the Sacred Tree is also called the Tree of Ages. Not to be confused with the other tree of same name that Menōmaru once used.