This season's Spike episode contains strong character development, as usual.
Spike's episodes are typically very strong in the category of character development, and "Dragon Quest" is no exception. Spike's internal conflict here is a strong one that brings up themes about identity, while still developing his character in interesting ways. Meanwhile, there's plenty of good humour, and great synergy between main characters.
Spike is at the centre of this episode, and much like in "Owl's Well That Ends Well", he experiences some excellent character development. In this episode, Spike find himself questioning his identity, then finally coming to terms with his own values and his place in Ponyville, alongside his relationship to the ponies closest to him. It's a strong bit of character work, and continues the trend of supplying Spike with depth. Thematically it also works, as the ultimate lesson is that who you are on the outside doesn't define who you are on the inside. This is an old and common message, but it's no less potent here.
There are jokes aplenty in this episode, and the humour is great here. Comic timing is on point and writing is clever, and other jokes tie in nicely to the character development. Rainbow Dash saying she's done "plenty of nutty things" is funny, especially with Rarity and Twilight's reaction to it, but it's also an admittance of making mistakes, which is a sign of maturity and growth for the usually arrogant Rainbow. Rarity, meanwhile, seems to mostly miss the point of disguises and camouflages, but her presence still shows she means well, and her putting up hooves to fight at the end is also a sign of character growth. Rarity's several episodes of learning to put those important to her first really shine through there.
Rarity, Rainbow Dash, and Twilight don't necessarily have the most complementary personalities, and yet this episode displays superb synergy between the three. Their friendship is apparent here, which is a very good thing for a show about friendship. They're working in conjunction under a dragon disguise, and that they work together so well in that disguise is a testament to said friendship. Similarly, the bond they have with Spike is shown very strongly, and it has a deep emotional effect.
"Dragon Quest" is a superb episode, which is to be expected from Spike's episodes. It's odd that Spike has the most consistently excellent episodes, but perhaps him being a slightly less major character has a direct influence on that. Those who write him clearly care about writing him, and it shines through in his episodes, such as this one. That is the strength of the Spike episodes, and that is the strength of "Dragon Quest".