The Evil Spy is Count Geoffrey's spy. He is a human disguised as a dragon. He gathers information by spying on the dragons of Camelhot, and gives it to Geoffrey, although his voice is never heard onscreen (aside from him saying "Psst!" in his final episode).
There are in fact three Evil Spies in the course of the show. The first has a light purple dragon costume. In A Gift for Griddle, he is knocked into the moat by Count Geoffrey and eaten by crocodiles.
He is replaced with an identical Evil Spy afterward, but in Shamrocks & Shenanigans he is vacuumed up by Evil Knight 1. The third and final Evil Spy, whost fate is left unknown, has a green dragon costume.