Only King Dain Ironfoot knew that Durin's Bane was a Balrog. But his knowledge didn't save him from being a fool. He let Balin lead a team of Dwarves into Moria -- and they all died just before Gandalf and company arrived.
While the colony was initially successful, Orcs and Durin's Bane, the Balrog, attacked them five years later, killing all of the Dwarves. However, Gimli did not know about the Dwarves' fate in The Lord of the Rings: The Fellowship of the Ring.
The Balrog killed Durin VI, the Dwarf-King of Khazad-dûm, whereafter it was called Durin's Bane by the Dwarves. Avarice, principally for mithril, drove the dwarves to go too deep and awaken the Balrog.
The Dwarves knew the Balrog killed Durin VI and Nain I. Gandalf knew because he knew about the Balrogs because they are the same race as he is, Maiar spirits, and he would have also know one was found deep within Moria and was responsible for the attacks on the Dwarves.
So, when Gandalf agreed with Frodo's decision to travel through Moria, he knew that something could be hiding there. Yet, he had no reason to think that it would be something as awful and powerful as a Balrog. Only King Dain Ironfoot knew that Durin's Bane was a Balrog.
For more than five millennia, the Balrog hibernated in his deep hiding place at the roots of the mountains in Khazad-dûm. He remained undisturbed throughout the Second Age and most of the Third, before the mithril-miners of dwarf-King Durin VI awoke him in T.A. 1980.
The company fled with Gandalf, but the Orcs and the Balrog, taking a different route, caught up with them at the Bridge of Khazad-dûm. At the Bridge, Legolas instantly recognized it as a Balrog, and Gimli recognized it as Durin's Bane.
Gandalf didn't know that the Mines of Moria had fallen. He mentions he had been through Moria before, but it was before it had been resettled, which means it would not have had the chance to be overrun yet. All that was known about the mines was that the dwarves had gone silent.
Secondly, Balrogs were the epitome of malice and power while Sauron only ever won one of three fights he ever had. Sauron was the great deceiver. His power lies in planning, subterfuge, manipulation, and corruption.
Although both the Balrog and Smaug are creatures of fire, and Gandalf is able to match them thanks to the power of his fire ring, defeating the Balrog takes far more spiritual prowess, which is why Gandalf is able to essentially 'level up' and comes back as Gandalf the White, whereas defeating such an immense physical ...
Balrog vs dragon, as a general setup, is simple to answer. Balrog. Even in the earliest writings, when Balrogs were much, much weaker and more numerous than they are in the conceptions you probably identify with them (as in, what Gandalf fights), Balrogs are stated outright to be more powerful than dragons.
The only recorded instances of Balrogs having been slain are Gandalf's slay of Durin's Bane, Echtelion's slay of Gothmog and Glorfindel's slay of an unnamed Balrog.
In the end Tolkien stated that there were probably "at most" seven Balrogs: In the margin my father wrote: 'There should not be supposed more than say 3 or at most 7 ever existed. '
Though Gimli has no children, he is not the last Dwarf of Middle-earth. After the fall of Sauron, his people continued to thrive in the Lonely Mountain. Gimli made his home in Rohan, in the Glittering Caves of Aglarond, and many of his kinsfolk came with him.
However, in the Tolkien novel, Gandalf actually never knew about the Balrog. All he knew was that Moria had been evacuated because of something called Durin's Bane, and that it still lurks inside. And while he does know that Orcs attacked the Dwarven kingdom, it was many years ago, and so he hoped they were gone.
Defeated by the Host of Valinor in the War of Wrath, Morgoth was banished from Middle-earth into the Timeless Void, though it was prophesied that he would one day return.
Glorfindel fought the Balrog and succeeded in slaying the monster, but was himself mortally wounded. His body was recovered by the great eagle Thorondor and buried under a stone cairn, where afterward grew yellow flowers.
No, Balrogs do not serve Sauron. Similar to Sauron, Balrogs are Maiar, powerful spiritual beings second only to the Valar themselves. They were corrupted by Melkor's evil before the first age and were made into Valaraukar (Demons of Power). They very strength and wills were bound to Melkor.
Sauron does not fear Durin's Bane because essentially they had been allies back “in the olden days". Both Balrogs (all balrogs) and Sauron chose to serve Melkor/Morgoth.
The name “Durin's Bane” literally means “that which destroyed Durin”, so it's fairly certain that the name referred only to the balrog in Moria. The dwarves didn't know what it was, since none of them had ever actually seen it. They just knew something they had never encountered before had killed Durin.
Gimli didn't know about Moria's fate because there had been no communication between Erebor and Moria for 25 years, and the Dwarves were hopeful and did not want to accept failure until there was certain news.
In the fictional world of J. R. R. Tolkien, Moria, also named Khazad-dûm, is an ancient subterranean complex in Middle-earth, comprising a vast labyrinthine network of tunnels, chambers, mines and halls under the Misty Mountains, with doors on both the western and the eastern sides of the mountain range.
