What if it's two sheep and a wolf voting on what's for dinner? Does it then suddenly become Democracy? How do you distinguish wolf from sheep in the real world where everyone's actually a human?

No, it becomes democracy when the sheep and wolves agree on a framework that is designed a priori to protect the interests of all animals. Here's an example:

No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

So, the two wolves vote to make the sheep a non-citizen (Or, two centuries ago, a non-person), and the problem is solved.

This is, of course, happening right now.

The idea is that all citizens enjoy a level of equality in the democratic process, and so there are no wolves because everyone should be able to work together.

Cynics argue, but the idea of democracy is that those who appear most capable get put in charge. If you strip the most competent people of their ability and incentive to take control the system for productive use then the results are likely to be bad for everyone.

It is, actually. Just because you don't like the outcome, that doesn't mean it's less democratic.

So, suppose a party were to announce that their goal is to install a dictator for life. What would you consider more democratic, a government that shuts down that party (limiting the choice in elections) or a government that hands power over to them after an election (thus putting an end to elections altogether)?