Like the OP, I first discovered this unusual expression on Stack Exchange.
Moderators on Stack Exchange are not employees, they are volunteers who have special privileges and powers that help them moderate a community. They are identifiable by the diamond ♦ next to their username, and they have either been appointed by the company or elected by their peers. Moderators generally hold their position for life but they are free to resign at any time they please.
Under egregious circumstances, the company may decide to strip a moderator of their privileges, this has lead users to say that a mod was fired (AmEng), sacked (BrEng) or dismissed but these terms imply that the moderator was a paid employee; nothing could be further from the truth. As a result, the act of demotion or degrading a moderator is called demodding, and to be downgraded is to be demodded.
Searching online, there is an example of its early usage, dated October 10, 2004, in Urban Dictionary, under the entry of DanSTC
DanSTC, when will you learn that nobody respected you or thought your opinions mattered before and after you were demodded and banned?
From January 17, 2005
Ok, The Reason I Want Stryder Out Of Admin is because he demods me from media because i do the simpleest mastakes known to life on earth, ok today 1.16.2005 I got demodded from media, ok here is the reason, I asked dan why we couldnt have HTML he said it was Dangoues i kept asking y is it Dangoues he said nvm each time, so i tell him I am going to make a poll about it in Rants/Raves (By The Way Where Anything Goes) So I Go Making A Poll, If lndforums.com should have html off or on and about 10-20 minutes later on Msn he goes and says your Demodded, i mean 4 gods sake he didn't even give me a warning, so can you please sign this petiton to help me get rid of stryder from admin, I'd Really Like It If You Would Sign This Pentiton!
The term “mod” can also be modified with a different prefix re-, as in remodded. The citation below is dated February 2019
When the new discord was created, Nermal joined and eventually became a new mod after proving himself. He was promoted as a full mod until March 11th where he was demodded for a short period of time for homophobia. He was remodded by Kirbizia, which was one of the only times Kirbizia was in the right.
Dangoues = a typo or misspelling of dangerous
y = why
nvm = nevermind
4 gods sake = for god's sake