The Dream Butterfly picks up right where the previous episode left off. Moroha, Setsuna, and Mistress Centipede were sucked through a portal and landed at Higurashi Shrine in the modern-day. A quick battle with the demon shows us our first glimpse of Towa’s energy blade ability, something she’ll use throughout the rest of the series to make use of broken swords. Afterward, Towa, upon seeing her twin for the first time in a decade, goes to apologize to Setsuna. The only thing is, Setsuna doesn’t recognize her. 

Towa gets possessed by a parasitic plant demon called a hitokon and begins attacking Setsuna. Setsuna realizes that with the hitokon controlling her, Towa can’t hold back or hesitate and decides to use the situation to test Towa’s skills. 

Later that night, thinking Towa is asleep, Setsuna and Moroha discuss the reason she doesn’t recognize her sister. We learn that Setsuna’s dreams along with memories of her early childhood were stolen by a demon called the dream butterfly, leaving her unable to sleep. Towa was awake though and blames herself. 

This was a good setup episode with goals being established, more context is given, and plenty of characterization. It accomplishes what it needs to for the larger story and it’s an enjoyable watch.