This is One Step for the Dark Lord, or Even The Demon King, One Step At A Time.
This is… No different from Villager A… There can’t be a stronger being in this world! To become the strongest, Yuria, the sea king (or queen), came down in search of the strongest demon king. BUT… looking at the mirror, a face of a kid…? In exchange for legs she have lost all her powers… even then, still aiming to become the strongest, the painful journey of Yuria begins!
The protagonist is Yuria, the queen of the deep sea. After hearing about the battles taking place on land, she desires to go to the surface and check the place out. This requires putting on a holy relic that gives her legs and seals her powers. Her powers do return at various points in the story by consuming the gems on the necklace, but if they're all removed she will die.
Yuria's hair is red, not blue, but the demon you mentioned has blue hair, so maybe you just got them mixed up.
After emerging from the ocean, Yuria is powerless, penniless, and in a child's body. She picks a fight with some weak monsters expecting to crush them before discovering her powers were sealed by the necklace. She spends some time fighting weak monsters near a village and bartering for meals.
After hearing some adventures discuss potential riches, she follows them into a cave in order to try to steal some for herself and escape poverty. While in there, the adventurers encounter a demon and it kills Yuria, then easily defeats the humans. This releases her power - the activation isn't exactly unknown, as it's tied to her coming close to death. With her powers unsealed, she easily crushes the demons, but is unable to finish it off before her powers are sealed again. She lies and depicts this as letting him live, forcing him into servitude and sealing his powers, except when Yuria is in danger.