So the reason them or they is used instead of "it" is an derogative to our dragon.
"Draco must reach his full potential"
This makes our dragon less then human?
....You just merged two completely separate points together into one point that was never brought up, and then misunderstood that non-existent point.
As I said, the reason "they" is used, is because our dragon is not canonically one gender or the other. There is zero canon that says our dragon is male, and zero canon that says our dragon is female. And, again, that was done on purpose, because that way, everyone who says their dragon is male is correct, while everyone who says their dragon is female is also correct. The instant one gender, character customization is a completely pointless thing, as it meas that anybody who didn't say their dragon was the canon gender customized their dragon wrong.
And Dragon Master didn't say using "he" made our dragon less human, he said using "it" as a pronoun did.
and "it" is derogatory and reducing said identity to something less than people. as if they're a "thing" for not conforming.
"it" is not "he". "he" means gender is male. "she" means gender is female. "they" means gender is unknown or ambiguous. "it", on the other hand, means there is no gender, and the thing is question is n't even considered a living creature, but an object. Hence, in the narrative of Dragonfable, "they" is the most appropriate pronoun to be used, until such time as there is an in game option to decide what our dragon's gender is. At that point, the devs would likely add a code to scripts that checks if our dragon was set to male or female, and use the appropriate pronoun, like what probably happens with our character.
I'd attribute that to an anomaly, as that is literally the only time our dragon is ever referred to by a gender. Every other time our dragon has been referred to in third person via pronoun, it's almost always been a variation of "they", with the sole exception of Titans of Battleon, where "it" was used in a case of early installment weirdness.