@cheaze, it follows your finger, but the placement is offset so you don't cover the dragon while playing. Works real nice.
@pfg2009, we were 5 in the team, splitting up the work on things like the monetization part, a custom particle system, gameplay, etc. The effect is rendered full resolution every frame, and it runs 60 fps on an iPhone 5 (haven't tried older devices). We used the new CCEffectLighting, so it's really no more than two lines of code! I'm planning on writing a short blog post on how we did the background once the game is up on the App Store.
This is an updated gameplay video: