My theory:
Geslan Kingdom uses some sort of poison to turn undesirable people into bugs. They then use stories of this "poison forest" and these giant bugs as a pretense to bring in and dispose of knights that might threaten them, and justify their control and taxation of other peoples living in fear. The shifty doctor's sweet medicine is actually this poison. At the same time, the intelligent humans-turned-bugs came up with a remedy to the poison, which is what they were dumping in the well.
Crazy stuff, hopefully I'll see if I'm right eventually D: