There’s no harm in leaving it enabled. dnsproxy is a feature in connman (our network manager) that as its name suggests, provides a dns proxy, much like most home routers also provide a dns proxy. We disabled it by default some months ago because it was causing some very obscure issues for a few users (like addons unable to connect to a specific site) but I think the bugs that were causing that have since been fixed.
The connection “drop” was probably your phone deliberately dropping the connection when it discovered that it couldn’t do any DNS lookups. iOS now has a similar feature called “Wifi assist” which will drop the wifi connection and go back to 3G/4G if it thinks the wifi connection is not providing good connectivity to the internet. (Which would include dns lookup failures) This will happen even if the wifi connection itself is technically good.