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This is the residence of your pet Dragon. The Dragon's Lair has to be upgraded to certain levels in order to allow your Dragon to continue to grow. The Dragon lingers in front of his lair so that other players can see him on the map as well. By clicking on the Dragon, a window opens in which you can feed him. The higher your dragons level, the more you can feed him at once. In addition to this, the Dragon Bonus is displayed here, which accelerates the Vaporise Spell.
You can see how to construct the Dragon's Lair in the video below. This is also covered in the quests.
Details: The maximum level of this building is level 8 to begin with, after the Magical Transformation it is level 9
