The massive caterpillars can be found on ancient redwoods in magical forests. They don't seem interested in most heroes, but heroes need to be careful of them. They are extremely fuzzy, but each individual piece of fuzz is actually a magical spike that can explode if the caterpillar wills it.

These caterpillars cannot climb anything but trees, nor would they want to.

Perhaps these creatures are part of the setting for a different encounter, and heroes can try to push foes into them or a hill giant can throw heroes into them. Maybe a particularly creative and evil dragon has captured many of these caterpillars and lined the floors of his lair with them so that only a flying creature can pass - or maybe the heroes are hired to save one from a zoo by a friendly fae.