I've had an SPN theory for awhile but it would have been spoilery.
Still is if you aren't caught up with the season so a cut!
I think Dean did actually become a demon. I think he tortured souls in hell and that's what he's flashing back to. I think he caved that soon and THAT is why he's in denial. It also adds a level of "Do as I say, not as I did" to his constantly telling Sam not to use his powers.