Dragonshy is the first episode out of the "early show weirdness" phase. Previous episodes mostly had issues with not having a whole lot beneath the surface, but here's where the show really starts to shine.
Characterization has really developed into a strong suit with this episode. Of course, it's not at its height yet, but the potential can certainly be seen here. Each character is written in an entertaining manner, allowing their personalities to bounce off each other. Some characters are more prominent in this regard than others, with Rarity and especially Applejack having less time in the spotlight. That said, the entertaining ways that Rainbow, Twilight, Pinkie and Fluttershy interact certainly make up for it.
Much of the episode's comedy comes from characters reacting to Fluttershy's phobia of dragons, and their various shades of frustration are relevant to their character. Pinkie is far less irritated than the others, Twilight is fairly calm in trying to deal with the issue, and Rainbow is incredibly grumpy. Here Rainbow acts a bit rude, which might turn some off of her characterization in this episode, but much of her grumpiness is very funny to witness as it provides the image of her crossing her arms and scowling while floating just above ground up a mountain.
Visuals are splendid. The smoke from the dragon is nicely stylized, and our first glimpse of a dragon in the show is nicely envisioned in the show's style. The camera tends to remain close on the characters, and that is used for a visual gag midway through where Fluttershy is terrified to cross what we later see is a tiny gap. Chances are that Fluttershy wasn't scared of the gap itself but of the fact that crossing it would lead her to be closer to the dragon. This is an interesting subtlety in the episode, and much like the previous episode's ending shows an increased quantity of little details that appear in the show.
This episode's greatest strength is its humour, of course, and in that regard it's fairly clever. The contrast between the urgency of what Fluttershy's trying to say and the volume of her voice is funny. The fact that we don't see what happens when Pinkie tries to amuse the dragon is funny. The reveal that the gap Fluttershy has been fretting about was so small she could step over it is funny, and the knowledge that the other ponies made a fairly large leap over it is even more so.
Dragonshy is a very strong episode, and is a definite step up from Boast Busters. Showing some interesting details and a lot of great humour, this is a strong addition to Season 1 and a good estimate of where the show began to get especially good.