
It just reminds me of The Tale of the Yellow Dragon. It happened in there too. The prince was sacrificed in a similar barrel but the snake tricked another spirit and swallowed the sacrifice and became a god. And once the snake raised to a god status, it then became a dragon. I can't quite remember the exact details, but I also 100% believe that Mugo was used as a sacrifice and the snake swallowed him and they merged as one.

OMG I've found my ppl, hear me out!!! So basically, what some people have theorized and what I truly think after looking into it is that there are actually FOUR Mugos: Main Mugo, Monster Mugo, and TWO Sir (Old) Mugos (the REAL Sir Mugo and FAKE Ass Bitch Sir Mugo).
I think Main Mugo was the original human Mugo sacrifice (who fell in love with Jaheon back in ancient times), Monster Mugo is the snake monster that the Kang family imprisoned and sacrificed people to, and the REAL Sir Mugo could be the spirit from the myth where the author was inspired and put all three into one.
BUT WAIT!!! The Kang family isn't going to kill Mugo's lover and turn him into a vengeful, angry, powerful, god-like deity without a measure of control while reaping the benefits of his power, right!? I think this is where Fake Ass Bitch Sir Mugo comes in. I'm not sure how, but I think the Kang family put the Fake Sir Mugo in the creation process somehow (idk by what sorcery or power) but even the end of season 1 confirms that the REAL Sir Mugo genuinely cares for Jaheon while the FAKE Sir Mugo was only pretending to be him.
The Fake Sir Mugo is the only one I have no idea about hehe.
He was once human. The villagers sacrificed him to a serpent out of whatever superstition they believed in, maybe during a famine or some natural disaster. Somehow, Mugo became bound to the monster and eventually became one with it. That would also explain his revenge on Ja-heon’s family. By taking one of them as a sacrifice periodically, he’s mirroring what was once done to him.