So, I'm in a similar position. My DM whinges about everything, nothing is enough, etc. she can't be stressed or unhappy without everyone around her feeling it too, and when she's happy it's because her needs have been met even if at the expense of everyone else. If she has a thought, even a nasty one, it falls out of her mouth. She's very critical.
My dad was a lovely, grounded man. How he put up with her for years I'll never know.
Some things to bear in mind...
I've often regretted bitterly that he died, and she's still with us. It's not fair. I'm not a nasty person, there are many reasons why this way round has been very hard on us all.
He actually chose to be with her for almost 60 years. Active choices. I have to respect that. I actually don't respect the way he pandered to her- he made an active choice to let her carry on the way she does.
So your piggy in the middle is choosing to indulge his wife's ways, remember.
We can see someone's weaknesses and choose to overlook them. Just don't make yourself emotionally vulnerable to her. You know what she's like, don't expect her to change or be different.
She's judging you on her own standards. She knows what goes on in her own head, and assumes similar in yours. That's means what she says is not a terrible insult, even if it sounds like it. It's not based on her knowledge of you. It's based on her knowledge of herself. So let it go.
Be careful of your children. Give them tools to manage unreasonable people. Just because she's lovely with them now, doesn't mean she'll cope with them when they get older and break out of her idea of what a lovely grandchild is like. DM was great with babies, awful with unreasonable toddlers. It got better for us as the DC were old enough to realise the score, and behave accordingly. For my nieces and nephews it got worse as they didn't behave accordingly (cheeky teens).