The dungeon is a large building where the Naiads live. It is also where Sophia, the Mechanic and Gus, the Goblin Tinkerer are imprisoned. It is riddled with traps, which Xane claims would, "mince you into smaller pieces than the guy who delivered pizza." The traps include Spike Ball, wheels of fire and a flattening trap.
There's a big library in the dungeon. From library, Cyril finds a book where he learns the "banish undead" spell.