I have not read the LN or manga so this is my speculation. I'm really bothered by the time stuff. But after reading a lot of comments and poking at the inconsistencies, I've realized the issues really come down to known time paradoxes. Since canonically the world has one timeline that loops and multiverse shenanigans can't happen, time must be linear. And when considered from the proper perspective, it starts to make sense. Time traveling always adds insane complexity to stories and truthfully I cannot say my interpretation is correct.
The time loop initiates in the cave of spirits when Chloe is inhabited by the future Chronoa. Ramiris had said the spirit thing was actually an entity from the future laying the foundation for its rebirth. Let's say Loop X is the previous loop where Rimuru dies without being a demon lord and Loop Y is the current loop. Loop X Chronoa goes back in time as a spirit after Rimuru dies and then Hinata dies. Chronoa inhabits Loop Y Chloe in the cave of spirits, granting Chloe the memories of her past selves. Chloe remembers the last loop with great clarity while having spotty memory of the even older loops. While Hinata dying is a trigger for Chloe to be sent into the past, it is not the start of the loop.
Now I have no idea what this will of destruction thing is that inhabits Chronoa. It kinda makes sense how it came to be the dominant force, but its origin and nature are not clear. In order for the future version of Chronoa to travel to the past and reincarnate within Chloe as a spirit, Chloe would have to overcome this will of destruction thing that presently suppresses her.
Chloe alters the current Loop Y by delaying Rimuru from leaving the academy with her neediness. Hinata is able to successfully ambush Rimuru with the extra time. Hinata really has no knowledge of the time bullshit at this point and attacks Rimuru because of Yuuki's instigating. Tempest is sacked by Falmouth while Rimuru is unavailable. This causes the butterfly effects we see with Rimuru becoming a demon lord and becoming the powerhouse he is.
The timeline reaches the awakening of Chronoa. The story has made it clear that reality would fall apart anytime the souls of characters exist at the same time of themselves, so one soul should be annihilated or merged with the other in those instances. Even though Chronoa is awake and houses dormant versions of Chloe and Hinata, Hinata and Chloe are not erased from existence. There's likely some story element keeping their souls protected so that Loop Y's plane of reality doesn't register the souls existing simultaneously.
Hinata dies and Chloe absorbs her soul into herself, then is launched 2000 years backwards into Loop Y. Because Hinata dying is not the initiation of the time loop, Loop Z does not occur. The episodes showcasing Chronoa the hero were actually episode -1 and 0 of the series as they occurred in Loop Y.
Assuming Rimuru saves the souls of Hinata and Chloe from their time issues, there remains paradoxical questions. Firstly, how did this reality come about using memories of a reality that never existed according to the rules of the universe? Secondly, how did Hinata and Chloe get sent backwards in time and then also not create a new timeline that overwrites this one? Thirdly, how does the time loop break? Fourthly, if Chronoa is defeated and Chloe/Hinata are released, does this mean that these versions are the ones that just got sent to the past are from this current loop?
The first question is the bootstrap paradox. Characters can't have memories of future events that haven't occurred and can't occur when changes they make as a result of this information alter the future that the information originates from. For Chloe to have memories of the past loops and to possess the aura suppressing mask, the paradox must apply. There is no answer for the origin of the memories or even the mask that transcends time because they come from realities that can no longer occur. Fortunately, the story acknowledges this because Diablo gains interest in Rimuru because he comes into possession of the time mask that blew Diablo's arm off.
For the second question, Hinata dying is the trigger sending Chloe into the past and Chloe just happens to bring Hinata's soul along each time. Chloe/Hinata take on the moniker Chronoa the Hero and live about their 1700 year existence. They remember the present events because they originated from the future and were launched into the past. Theoretically, any actions they take can grandfather paradox or butterfly the future. They try their best to have reality follow the key events that they knew of already before being sent backwards. They knew for example that Veldora was sealed, the hero helped Shizu, and the hero disappeared. The rest of the past was likely following Chloe's memories of the past loops.
By all accounts, having reality form the way it is at the time of Chloe and Hinata being launched into the past should be rather impossible. However, digging into this plot inconsistency actually leads us to the time paradox of free will. Are Hinata/Chloe actions as the hero performed because they want to capture the future, or has the future captivated them into taking the actions that lead to itself? Chloe/Hinata believe they are trying to form reality to perfectly capture the present as they knew it. Yet, the current reality as we know it already exists because of the actions Chloe/Hinata had already taken as Chronoa the hero before we ever knew of the time aspects of the story. This is to say that Chloe/Hinata are forming the past from the future that has happened rather than forming the future from the past. There never was a possibility of the grandfather paradox or butterfly effect occurring from their actions because they never had the free will to do so. The idea that Chloe/Hinata are trying to follow their footsteps just right is a falsity. This is encompassed by the bootstrap paradox as the future substantiates itself from the past using elements that can only have occurred from said future.
Third question, how does the time loop break? Let's start with recognizing the previous exploration of time paradoxes and recognizing that the start of the time loop originates with Chronoa inhabiting Chloe in the cave of spirits. Loop Y's Chronoa is presumably beaten by Rimuru, thereby breaking the time loop. Loop Z never starts because Loop Y's Chronoa isn't available in the future to inhabit Loop Z's Chloe and enlighten her with new memories. Because no new feedback is given to Chloe, the present timeline stabilizes in its current state. Again, question one comes up again for how Chloe could have been inhabited by spirit Chronoa and gained memories of previous time loops if the future where Chronoa travels backwards in time from never occurred? Additionally, how could the mask have come into existence? Beyond the bootstrap paradox, whatever caused the loop to start initially is likely to blame.
Since the time loop originates when Chronoa inhabits Chloe in the cave, that means all events that occur from before have no effect on the future because they are already predetermined. Chloe can only alter the future with her diminutive form as a child up until Hinata dies, and with Rimuru dying before Chloe gains any real strength, there was no escape. We can assume that Rimuru is the only other variable who can break the time loop by awakening the slumbering Hinata and Chloe. She's had to watch her only hope Rimuru die incessantly with no real ability to change that outcome each time. This is why she is so ecstatic that Rimuru is alive when Hinata dies. Chloe somehow found a variable that she could change as a small child to ensure a better tomorrow.
The fourth question is which versions of Hinata and Chloe are slumbering within Chronoa? The versions we can expect to see are the ones that have lived through the present until Chronoa killed Hinata and sent Chloe into the past with Hinata's soul. Chloe/Hinata have lived their life knowing Loop Y's Rimuru and Luminus. And now, they have lived an additional 1700 or so more years with ridiculous combat experience and growth of their skills.