HEAVY SPOILERS, read only if you finish season 4. My theory about how the place work and the ending

Fromville is a never-ending story the children are forced to keep imagining

The MiY was never a demon himself — he was the one who knew the ritual to create Fromville out of the children's imagination. He most likely learned it from a demon, or more plausibly from the fae (look up the fae in original mythology — you'd be surprised), who explained it to him and taught him how to do it.

He manipulated and tricked the very first villagers into sacrificing their children in exchange for immortality. They were probably poor, starving people who arrived there hundreds of years ago by boat, back when there was still a river and a large lake — hence the lighthouse.

They originally lived near the lake, in the same spot where the people of our current cycle now go to gather food.

The original incarnations of Tabitha and Jade were involved in the ritual too: they sacrificed their daughter, regretted it, and saved their son — who became the BiW, the original memory of this place and of what happened there (see the talisman theories: there should have been eight children).

The ritual essentially made the children's fantasy become a real place; killing them then trapped them inside a never-ending story that simply restarts once it ends.

The town itself is the children's imagination. You can tell by the way electricity works, by the fact that the monsters sleep in caves and only come out at night, and so on.

Since the MiY was the original manipulator and knows the ritual and its rules, he doesn't exist like the other creatures — he has a will of his own. But he's trapped there too, and now that he's a monster he simply keeps doing what he did in the beginning: manipulating people — except now he also feeds on their suffering.

The children's imagination (aka Fromville, aka a story, aka a fable) grows richer and updates with every cycle through the people who die there. That's why it's always themed one generation back: this cycle is themed like the '80s — Victor's cycle.

Victor — and now Ethan, and others before him — are doomed to always be the town's only surviving child, because in the original ritual the children had to imagine the town with the BiW still alive.

The only way to set everyone free is to release the children from having to keep imagining the story. There should be a ritual for that — shown on the talisman — requiring Jade and Tabitha, the children's bones, and the presence of Ethan, since he is the eighth child (he was already having convulsions back in S1E1). It would have to be performed in the Lake of Tears.

Will they make it? Imo they won't — the MiY won't allow them to complete it — but they will still manage to turn the place into something less horrific.