This theory will be a bit long, so thank you for bearing with me.
First of all, remember the mysterious music from Season 2? Elgin said the boy in white told him that whenever they come, they have three purposes, and they move slowly, slowly.
They are coming, they are touching, they are breaking, they are stealing—unless you can stop the music.
First question: Who is coming?
In that music, it says "they are coming," and coincidentally, Martin tells Boyd in the dungeon that he has to leave before the music stops—they are coming, and the monsters are just the tip of the spear!
Now we have Sofia in the barn, and she reacts upon seeing the ballerina figurine and touching it.
First of all, this old nursery rhyme refers to malevolent fairies, and "they" are the Dark Fae.
Second, do you remember that in Episode 1, Ethan mentioned the fairies of the Lake of Tears? Behind the ballerina figurine is the location of the Disney Fairies castle, and the camera zooms in on that scene.
What's even more interesting is that this song exactly describes the Man in Yellow: "They are coming" — "They are touching" (first, he touched the priest and knocked him unconscious) — "They are breaking" (he broke the egg and revived Roger's corpse) — "They are stealing" (he stole the talisman stones).
The boy in white had told this to Elgin in a dream, and now we know that the Man in Yellow and the boy in white are playing against each other. It seems this was a warning from the boy in white about the Man in Yellow, and it's clear he doesn't state things directly.
The people from the town first see a fallen tree on the road, along with crows, and then they enter this town that has magical trees.
What if Martin is actually the Man in Yellow, who was imprisoned by the fairies of the Lake of Tears and the good fairies along with the ballerina music box, and Boyd freed him? This might be a bit confusing, but based on the Man in Yellow's behavior, he does exactly what Martin does.
Also, the Man in Yellow collects teeth—a tooth collection that steers everyone toward the Tooth Fairy. What if the original townspeople made a deal with a Fae to become immortal and turned into these creatures that are sensitive to sunlight?
Furthermore, there's a character named Clara who makes a deal with the Man in Yellow—her name references fairies—and the black eyes of the Man in Yellow point to the Dark Fae.