Dreadbeasts are misshapen beasts, mangled by corruptive hunger aura. Wei Shi Lindon and Yerin must battle numerous of them in book 2, Soulsmith. They were used as research subjects long ago, resulting in the accidental creation of Subject One, the first Dreadgod, followed by four more.
Dreadbeasts existed long before the rise of Dreadgods, even before historic clan Founder Ozmanthus Arelius, according to Suriel’s report:
He never lost his admiration for those who kept the world clean, and one of the most hideous plagues in the world was the population of dreadbeasts that roamed the countryside, feeding and spewing out more of their kind. With his weapons, he would clean the countryside. He found an ancient labyrinth, built by the original Court of Seven before their ascension. He researched their understanding, growing in knowledge and power. (-Reaper, ch 2)
The development of hunger madra came after Ozmanthus Arelius ascended (but hunger aura was around in his time):
“Anything from the Arelius founder should predate the introduction of hunger madra to this labyrinth. Did he anticipate this, or was he protecting against other threats? A puzzle for you!” (Reaper, ch 11, Eithan)
The lesser dreadbeasts, even those with the power of Lords,
had all looked like creatures from a horror story. They were
twisted and mutated bodies, broken from the inside out.
-Reaper, ch 11
Dreadbeasts are corrupted sacred beasts, whose spirits are mangled up with their bodies, unlike the distinct spirit found in humans and in sacred beasts. They love hunger aura, but it corrupts them.
They inhabit the Desolate Wilds and the surrounding areas because it’s near the Labyrinth in Sacred Valley, which is brimming with hunger aura — but its suppression field weakens them, and everyone.
But dreadbeasts keep their souls in their bodies,
nasty little things, so they leave no Remnants.”
(-Blackflame, ch 1, Fisher Gesha)
Dreadbeasts don’t leave a Remnant behind when they die, because their spirit is mangled into their bodies.
"A pure white aura that felt to Lindon’s senseslike an endless, gnawing greed for more. Hunger aura.-Reaper, ch 7
Hunger aura is a major problem, because it’s unnatural and corruptive and free-ranging. It corrupts anything and anyone it touches. And hunger aura, itself, is the unnatural by-product of corruption in humans — the bottomless need, greed, and endless ambition shown by self-interested Monarchs. Hunger aura does not exist naturally. (Reaper, ch 21, ch 24)
Hunger aura is not a natural force. It is a corruption of the natural order of Cradle. A manifestation of ambition, of selfish desire, created by the presence of Monarchs. Back then, "hunger aura drifted all over the world, and where it moved, all other aura weakened. It corrupted everything; Remnants, natural spirits, sacred beasts. Even humans." (Reaper, ch 21)
The details are still a bit unclear, but it seems that researchers attempted to manipulate dreadbeasts so they could leave behind a Remnant, to be used in Soulsmithing. Instead, they unintentionally created Dreadgods.
About 2500 years ago, roughly, Dreadgods came into the world, the result of research and experimentation conducted in the Labyrinth. According to Fisher Gesha, the notes Lindon found in book 2 in the Transcendent Ruins explain a little more:
These notes reference an origin for this madra, a single source from which they got all their samples. They were trying to breed sacred beasts that left Remnants of this aspect, but they never made it. At least, not by the time these notes were written.” (Skysworn ch 7)
So, apparently, each of the four Dreadgods was originally an unremarkable dreadbeast when the research team tampered with it. But a human researcher, dubbed Subject One, was the first one to become a Dreadgod because he put the hunger binding into his own body, to test his research, as he was the lead scientist, and because the lure of powerful hunger madra was too tempting (Reaper, ch 21).
Thus, the researcher became the subject of a failed experiment. Subject One is confined deep in the Labyrinth at Sacred Valley. The other four Dreadgods did escape, but they always strive to come back to the Labyrinth, because it’s rich in hunger aura, and home to Subject One.
In the Labyrinth, Lindon dissected an altered dreadbeast — a Hydra he dubbed a “baby Dreadgod” — to examine its core binding:
.. .lines burned with the pale, spectral green of death madra, running in veins all through the Hydra’s flesh. “This is.. .” Lindon had dissected his share of dreadbeasts, and it was hard to put into words how shocked he was by this sight. “. ..it’s so organized. This looks like a real set of madra channels. And how can death madra, of all things, possibly exist alongside real, living flesh?” (Reaper, ch 11)
Later, Lindon used the pulsing hydra binding when soulsmithing Reigan Shen’s broken death trident into a weapon: Midnight, Cursed Spear of the Destroyer. He also used “the bone ring set with the ruby, the object that had once given birth to the Bleeding Phoenix. He felt its weight on the world” (Reaper, ch 18)