Most Tolkien fans seem to believe that Smaug would have the upper hand. After all, he was much larger than Durin's Bane. Plus, he could fly, while the Balrog (whether he had wings or not) could not take to the air.
The short answer is, Balrogs.
Although both the Balrog and Smaug are creatures of fire, and Gandalf is able to match them thanks to the power of his fire ring, defeating the Balrog takes far more spiritual prowess, which is why Gandalf is able to essentially 'level up' and comes back as Gandalf the White, whereas defeating such an immense physical ...
Gandalf absolutely could have killed Smaug in a one-on-one fight. The grey wizard fought and defeated the Balrog of Moria, and a dragon was a lesser evil than that. As proof, Morgoth -- the original Dark Lord of Middle-earth -- created and bred dragons to his evil purpose in the First Age.
Sauron, by a landslide. Sauron is a Maia, an angelic being with great power. If we're talking about Sauron at the height of his power, back in the 1st/2nd age, Smaug would never stand a chance. While Smaug is big and whatnot, in comparison to other dragons in the history of middle-earth, he's pretty small.
Peter Jackson certainly makes the assertion in the theatrical and extended editions of the Hobbit movies that Smaug and Sauron are not only well aware of each other, but are planning to ally with each other. Smaug even seems to have detailed knowledge of Sauron's coming plans.
Smaug could easily have cut through the armies of Mordor, and delayed the invasion of Middle-earth by years. So it wasn't in Sauron's interest to take on the dragon, but that doesn't mean he saw it as a lost cause, as he fully planned on creating an alliance.
By my understanding, the Balrogs were seen as undefeatable up until the battle of Gondolin, when up to eight were slain (3 (?) by the House of the Hammer, 4 by Ecthelion & 1 by Glorfindel), depending on the account read. Gandalf obviously also kills Durin's bane in Moria during LOTR, bringing the total up to 9 (?).
The townsmen's arrows and spears proved useless against the dragon's armoured body. The thrush told Bard the Bowman of Smaug's one weak spot, a bare patch on the dragon's belly. With his last arrow, Bard killed Smaug by shooting into this place.
No, Balrogs do not serve Sauron. Similar to Sauron, Balrogs are Maiar, powerful spiritual beings second only to the Valar themselves. They were corrupted by Melkor's evil before the first age and were made into Valaraukar (Demons of Power). They very strength and wills were bound to Melkor.
The most powerful dragon to ever exist since the dawn of time in Middle-earth, and the chief of the Winged Dragons of the War of Wrath, is Ancalagon the Black. His death at the hands of Earendil is legendary because he is killed after considerable effort, although the exact specifics are not mentioned.
No, he can't. While some dragons had breath hot enough to melt the lesser rings of power, Gandalf says: [...], nor was there ever any dragon, not even Ancalagon the Black, who could have harmed the One Ring, the Ruling Ring, for that was made by Sauron himself.
From this point on, up to the year of the War of the Ring in 3018 there is a cohabitation of the Balrog and the orcs for 538 years! Certainly Sauron knew of the existence of the Balrog (especially at the point when his orcs entered Moria), and the Balrog seems to have tolerated the presence of Sauron's orcs.
Capabilities. Balrogs were incredibly powerful creatures. They were amongst the most trusted and oldest servants of Morgoth, and, with dragons, were the most powerful creatures under Morgoth's command, possibly one of the most powerful entities in all of Middle Earth.
Ancalagon, often titled "The Black", was the greatest of all winged dragons. He was bred by Morgoth during the First Age and was the largest dragon to have ever existed in Middle-earth. His appearance in history was restricted to the War of Wrath.
The most powerful of all the Balrogs, one of the chief servants of Melkor, who held an authority hardly less than Sauron himself. A wily commander and fearsome fighter, Gothmog was often accompanied by others of his fiery kind, and at least in the Nirnaeth he had a personal guard of dozens of Trolls.
Smaug is red and gold, with fiery breath, sharp claws, and a hide as strong as a diamond. Bilbo is horribly afraid, but he works up the nerve to take a single golden cup from one of the piles.
For 171 years, Smaug hoarded the Lonely Mountain's treasures to himself, staying within the mountain, until a company of Dwarves managed to enter the Lonely Mountain and awaken him from hibernation.
In all of Tolkien's text I've read, there are three people who have killed a Balrog. Ecthellion, Glorfindel and of course Gandalf. All of these fights ended in a draw with all three sacrificing their lives for the deed.
A Balrog who was self-incarnated as a creature of “fire and shadow” was not using a body of flesh and blood like Sauron did in his wolf-shape. So the Balrog could not bleed, although it might be weakened by receiving painful wounds. Such wounds might diminish an Ainu's ability to concentrate and maintain its shape.
In the end Tolkien stated that there were probably "at most" seven Balrogs: In the margin my father wrote: 'There should not be supposed more than say 3 or at most 7 ever existed. '
When it came to the show's sprawling list of characters, most were unlikable and almost all were involved in some sort of manufactured conflict with one another. Whereas The Lord Of The Rings focused on friendship and camaraderie, Rings Of Power set up ridiculous, endless squabbling between most of its key characters.
Sauron allied with Smaug and intended to use the dragon's powers against the people of Middle-earth. But before that could happen, Smaug was slain by Bard the Bowman.
The main difference is that, in the books, they were forged after the other Rings, not before. This means that the three Elven Rings weren't imbued with Sauron's malice, making them the most powerful among the Rings of Power — and the most coveted by the Dark Lord.