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Demons are malevolent spirits created by Lucifer. They are created from corrupted human souls that have endured extensive torture in Hell by Alastair and other demons. In this process, they become corrupted, extremely evil, and also very powerful. The species as a whole functions as the series' primary antagonists and are the most recurring supernatural creatures in the series. Similar to Angels, they require a Vessel to walk the earth, though are able to roam in their smoke form.
After humans were fully evolved, God created a paradise on Earth called the Garden of Eden. He placed humanity in the Garden, and declared them his favorite creations.
He told all the angels in Heaven to bow down before the humans, and serve them. The archangel Lucifer refused to bow down before a species that was younger, and inferior to him. He claimed that they were "flawed, and murderous." He declared war against God, and was eventually cast down to Earth.
God placed Gadreel (his most trusted angel) to guard Eden from the fallen Lucifer. Lucifer somehow managed to break past Gadreel's defense, and sneaked into the garden. As a payback to God, he corrupted Lilith's soul, and made her into the first demon.
Lucifer, still in the garden, corrupted the minds of the humans, and tricked Adam and Eve into eating the forbidden fruit. God cast humanity out of the Garden for disobeying him.
Adam and Eve had two sons, named Cain and Abel. Lucifer was able to manipulate Abel into listening to him, rather than God. Cain saw what Lucifer was doing, and offered his own soul, so that Abel could go to Heaven. Lucifer agreed to the deal, but Cain had to be the one to slay Abel.
Cain then fashioned a blade out of the jawbone of an ass, and Lucifer placed a mark on Cain's arm, which powered the blade. Cain took the mark and blade, and slaughtered Abel, sending his soul to Heaven.
God then created a personal cage for Lucifer, which was locked by 66 seals. Ironically, the last seal that needed to be broken, was the death of Lilith, the first demon he created, and the reason he was placed in Hell.
Before he was locked away, Lucifer ordered Cain to train more demons. After slaying Abel with the blade, the mark gave him a murderous rage, making him have to kill humans to feel better. The more he killed, the better he felt, but the less he killed, the worse he felt.
Eventually, he couldn't bear the murder, and didn't want to become the killer the mark wanted him to be, so he took his own life with the blade. The mark didn't want to let go of Cain, so instead it transformed his soul into a demon, and the first Knight of Hell.
Following Lucifer's orders, Cain trained Knights of Hell. He trained the Knights to be ruthless, merciless, and they pillaged the Earth.
Humans became wicked, and started going to Hell instead of Heaven. There, their souls were tortured, twisted and corrupted, where they became demons. Those demons make deals on Earth, condemning more souls to Hell, where they too will be corrupted into demons.