In the earliest history of Middle Earth Ilúvatar created the Ainur or Holy Ones. When Melkor (later Morgoth) rebelled, he drew away many of the Ainur after him. Some of these, spirits of fire, became the balrogs. The name balrog is Sindarin for demon of might (Valarauko in Quenya) and they were among the most feared servants of Morgoth. The lord of the balrogs was Gothmog. After Morgoth was defeated, the few balrogs who survived hid themselves deep beneath the earth.
The balrog fought by Gandalf in Moria was one of those balrogs that once served Morgoth. It had long lain dormant far beneath the earth but was awakened when the greed of the dwarves of Moria led them to mine too deeply for the metal mithril. There was never anything to suggest that the balrog served Sauron or anyone else at the time. The orcs who had originally been sent to Moria by Sauron feared and served the Balrog. Gandalf fought the balrog at the bridge of Khazad-Dûm and allowed the rest of the fellowship to escape. Gandalf was the only member of the fellowship who would have been a match for the balrog as he himself had once been Olórin, one of the Ainur. If Gandalf had failed and the balrog had taken the ring, it is likely that it would have used the power of the ring to challenge Sauron as a rival rather than serve him.
Note: The question of whether or not the balrog of Moria had wings has long been a favourite and unending debate among Tolkien fans. The popular opinion is that it did though some people have presented good reasons why it didn't. Tolkien never really made it clear either way.
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