Enter the Gungeon: Mystery of the Caterpiller solved!
With some asset bundle edits I was able to swap dog for the unused caterpiller companion. I found out what he does.
He will "eat" armor drops on the floor (if you let him). After eating 3 a transformation animation starts and he "gives" you "Fairy Wings". An unused item in Gungeon. However because that item doesn't exist now, I had to also edit his behavior prefab to give me wax wings instead.
This video demonstrates how he works more or less. He's also supposed to despawn after giving you the item payout. However that doesn't happen. Probably due to how I spawned him in on a passive item he wasn't meant for. But yeah he more or less works once you make a few small edits. :D
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At present, Apache Thunder has 41,813 views spread across 25 videos for Enter the Gungeon, with his channel uploading an hours worth of Enter the Gungeon videos. This is 6.41% of the total watchable video on Apache Thunder's YouTube channel.