I've been in your granddaughter's situation. When I was her age, my mom was a drug addict with bipolar, and she had abusive boyfriends. My grandmother's relationship with my mom was very rough. They would fight all of the time. Whenever people were fighting, it would upset me. I felt scared and felt like somehow I was responsible for the problems. That is very common for little kids to feel responsible for other people's actions.
Your daughter is going to date who she wants. It sounds like she is in an abusive relationship, but nothing you say is going to change that. You can provide a stable environment for your granddaughter when she is with you. Although it might be tempting, I would suggest that you don't bring your battles with your daughter into the discussion with your granddaughter. I was always between my mother and grandmother, and it was not fun. It always centered around my grandmother trying to control my mom's actions. Then, my mom would blame my grandmother for everything wrong in her life. It was an endless cycle.
It is good that you recognize the situation. Have you talked to your doctor about the amount of Xanax that you are taking? In my experience with Xanax, I had a rebound effect from it. It would help with the anxiety right away, but then the anxiety would come back worse later.