Well, thanks for reading all of that! Of course I know that balancing is a rough ride that mostly ends either in "too easy" mode, or in "too hard" mode. And I get where you want to be going with the game (and I would call that the right direction). (By the way, I was trying some more plays with the axe slash guy, and I even got to see the dragon! (Not that I got to hit it, though.))
Anyway, some more random thoughts:
If the game should require some mastery to win consistently, we should ask where that mastery will be coming from. I think that most of it will be coming from the strategic (high-level) considerations like: what level-up to take, when to go beat a miniboss, when to run for a potion, when to try to collect the gems that were previously left on the ground somewhere else. Since the dragon boss comes in a fixed amount of time, the object of the game is essentially to prepare well for its coming (while not dying in the process). At the high level, I guess this could be considered a game of risk management (risk too little and you will be unprepared, so you won't have much chance on taking out the final boss, risk too much and you get killed). And that itself needs to give the player a way to manage the risks.
The core game loop seems to be very solid, but it doesn't allow for too much tactical (low-level) mastery. There's a couple of things we can do, though. First of all, I think there should be more obstacles and perhaps other "terrain": you can use it to split the monsters or make them get stuck (and of course you can get stuck yourself). That's interesting to manage.
The second thing is that we can "get rid of the conga line". The line emerges so much because of three factors: 1) all the monsters go straight towards you; 2) you don't want to be close to them; 3) all the weapons work best when the monsters are tightly packed and/or as many of them as possible are on the same straight line with you.
Each of these factors can be quite "easily" removed: 1) make some monsters move in other fashion (e. g. if they're too tightly packed let them go perpendicular to make sort of a circle); 2) make the close combat less fatal; 3) add attacks with other patterns (circles or something more spread-out).
Another thing that could be done: let the heroes block 1 point of damage each round. That could allow for more daring tactical maneuvers with more considerations (do I get more into contact and risk getting enveloped, or do I chicken away?), as well as fulfilling the point 2 above, but it won't save you if you really screw up; also bosses do more than 1 damage, so you will still get hit by them.