The town segment appears to be an idealized version of the Undertale world - humans and monsters living together and one that now appears to be threatened by Chara. I don't think it's an accident that we have so many anagrams involved in the game (Ralsei = Asriel, Deltarune = Undertale, more I've missed I'm sure). My guess so far is that it's a battle for our/Kris' soul.
I have a few guesses that are going on with the plot.