Holo-demons are digital constructs created by the techno-mages. They are essentially highly-aggressive and malignant programs that could manifest as "solid" holograms or else infect networks and computer systems, allowing the techno-mage to control them.
Londo Mollari and Vir Cotto both encountered holo-demons when the techno-mage pilgrims led by Elric came to Babylon 5. Elric attempted to use a massive demon to scare Cotto away, but failed to do so. Later, when he caught Mollari trying to use a hidden camera to spy on a private meeting between himself, the ambassador, and Captain Sheridan, he sent another holo-demon into Mollari's computer files, destroying his accounts and causing him to purchase shares of pointless companies. Even after Mollari apologized for his actions, Elric had one last bit of fun at Mollari's expense, sending three small, imp-like holo-demons with him who wrecked his quarters. Finally, Elric undid the spell, sparing Mollari any further pain and suffering.
Many techno-mages use holo-demons in this fashion, as a method of scaring away outsiders or causing pain and misery upon their enemies. The techno-mage Alwyn used holo-demons to scare away an Earth Alliance mining operation that he saw as intruders on the planet he now called home. He conjured the image of an enormous, golden dragon. Upon meeting his old friend Galen, the younger techno-mage complemented Alwyn on the quality of his holo-demons.
Being computer programs, holo-demons are entirely digital, but they can manifest as holograms as well, thus their moniker. They utilize quite-advanced holographic projection technology, as holo-demons appear to be solid, capable of physically interacting with matter and energy in the surrounding environment. They can even last when seemingly separated from their projectors by great distance. Such technology is far beyond any known science, as other examples have shown.