I really like the idea of enemies dynamically changing appearance with their health! It definitely improves on both the general aesthetics of the game and the communication of an enemy's relative strength to the player.
I did feel a little lost at the start of the game, myself, and I do think that a little more guidance about where to go would be an objective improvement. At first, I didn't realize that I could walk off to the left side of the city. It's not terribly vague, but more explanation about your objective would always help.
Regarding the criticism about the game being too hard, I think I can imagine why someone would think that. Toil begins the game in a somewhat weak state, and the enemies do a considerable amount of damage to him on the first excursion into the dungeon. However, the dungeon treasures are very powerful and relatively easy to reach if you run from every battle, and in turn, that makes grinding on the enemies at the top floors quite effortless. I think some way to balance out the game's difficulty on both ends would work well; making Toil stronger in the initial state of the game but reducing the power spikes he can get outside of levels in exchange might be a good idea.
I'm not sure if RPG Maker MZ will allow you to easily do this, but I think that dynamically reducing the experience easier enemies give until they finally no longer award any would greatly improve the balance throughout the dungeon. Aside from that, I think that the harder enemies should drop their own exclusive resource that's involved in the creation of the demon equipment. As it stands now, there's no real reason to want to fight harder enemies, so giving the player a motive to do so would make them a lot more notable and useful.
I'm impressed with the effort you're putting into the development of this game and I'm very excited to see more!