So as I see it, the dreamon and nightmare We're actually the same entity, however I like to imagine that the dreamon had a split personality and it was split between the evil mode and kind of Jerkish but really deep down cares about others, when tubbo and fundy defeated it, the demon like entity split into 2/2 representing its personalities, the personality nightmare had was the jerkish personality, he ended up finding dream and changing his appearance to look like dream, and tried to go to dream on a nicer path, however when the thing made a joke on burning George's house, that's when the other half of the Dreamon appeared trying to convince dream to actually burn, well nightmare and his other half were arguing dream actually did set the house on fire, after that dream seemed to listen to the dreamon more then nightmare, fully cutting his ties with nightmare while he was preparing to confront both tubbo and Tommy about the desks, I feel like nightmare trying to protect with you and manage to get all the members of the SMP that showed up there to go and stop dream, and when dream realized what was going on and who he was listening to, it was already too late he was put in jail and now the Monster that had at one point been controlling him was now tormenting him after manipulating him into ruining his friendships and the trust others had for him. Meanwhile no one knows about nightmares past and what he actually is, only choosing to reveal himself to a select few he trusts,

Nightmare had actually growing to hate his other half while they were still one being, and was truly pissed off when it took control over dream, so nightmare doesn't even talk to dream anymore at this point, seeing him as a lost cause

(this whole head cannon is the main reasoning behind his glow up)