I like the distinction between physical and arcane and the seperation in this order's structure a lot. Having multiple divisions of the knighthood would create interesting roles to fill and leave room for a variety of personalities for the party. Coping with this emotional and physical burden would definitely grow the whole cast. Maybe they might have to put one of their friends down since they have become too lost? This 'demonization' as you called it, sounds like a great term to use. 

I'm excited! I'll start writing up a character outline very soon.