Alternative Character Interpretation: So Daly is an asshole. He's a genuine psychopath, and he zig-zags this. He is aware that the people he puts in his game have fully sentient consciouses, but was effectively bullied in real life and uses being a domineering asshole in a video game as his outlet — which a lot of people do — it just so happens that in this society, overly-realistic virtual realities are the video game norm. Of course, a lot of what he considers being mean to him in real life are perceived slights (like Nanette saying she's got a thing for his mind but not for him, to her friend) or just incredibly petty (one character was put into the game for bringing Daly the wrong sandwich, another is heavily implied to be there because Daly envies his looks and confidence). They could well be exaggerated to him not only because he clearly has issues, but also if he's had a history of being bullied (which he probably has), some form of social anxiety can make him genuinely believe that everyone hates him from the second he meets them, and any affirmative action could be deeply wounding (especially when initially Nanette had expressed such admiration).
Complete Monster: He is a sociopathic inventor who has created a special mod of the online game Infinity. By taking the DNA of his co-workers, Daly can create fully sentient digital clones in the game, which he uses to torture and mistreat to relieve all his frustrations. Endlessly abusing and humiliating them, Daly refuses to grant them any relief, at one point sealing one woman's mouth to suffocate her and painfully transforming another into a monster when he wishes to make a point. Constantly putting them through endless pain and abuse, when one, Walton refused to play along, Daly got the DNA of his young son and threw the boy's clone out of the airlock with the threat he'd revive him and torture him worse if Walton didn't knuckle under. When the crew tries to escape, Daly vows to torture them even worse than before, starting with Walton's son, threatening how his punishment will be "biblical".
Draco in Leather Pants: Unsurprisingly, Daly almost immediately attracted defenders claiming that his actions are completely justified, the crux of the argument being that his victims aren't real people—never mind them being real enough to think, feel pain, and even contact and interact with the outside world in a desperate bid to escape his torture.
The revelation that Daly broke Walton by flushing his son Tommy out of an airlock whilst forcing him to watch. Even if they are only digital copies, it's still monstrous. The fact that he threatens to do so many times more, in even worse ways, if Walton steps out of line only cements it.
Alternatively, you could argue that Daly crossed it even earlier when he turned Gillian and Shania into giant insectmonsters.
An interesting debate, because he almost certainly crossed it the moment he decided to lock sentient beings into a program for his personal amusement, but we don't really understand the depths of what he's done until partway through the episode.