The Demon Chi is the chi (energy/essence) from the Demon Sorcerers that was attached to the symbols of the Immortals who banished the demons to the Netherworld.
Drago tries to absorb them to rule the world.
Anyone who absorbs a Demon Chi will gain the powers corresponding to the Demon Sorcerer owner of the chi, but the chi will also mutate the person's body, making it look like the Demon Sorcerer, and slowly corrupt the person's mind, because of their evil nature.
Uncle Chan created a device to absorb the Demon Chi and a large container at Section 13 to guard all the Demon Chi at once. He later upgraded his device to absorb more than one chi at a time.