I have a Dana 20 in my CJ as well
. The transfer case version that is. But also an AMC 20 rear axle.
From my understanding, any time you change gearing, you need to reset the pinion. Which also per my understanding, if you don't have a lot of experience, you should leave that up to someone who does.
Just curious as to why you might want to go from a 3:54 to a 3:31. Would not think it would have that great a difference. Now going from 3:54 to 2.73 would. But I would not think most would want to do that as it would make things more sluggish for you.
Also, if you change one set of gears you have to change the other. So you would need to do both the front and rear at the same time. So you are now looking at some $$$ for a slight gear change.
Here's a good chart to go by when it comes to ratios versus tire size:
https://www.4wheelparts.com/off-road/ge ... meter.aspx
3.54 is a pretty solid all around ratio. I have it in both my CJ and FSJ and it turns 33s just fine. Do I want to rock crawl with it? No. But it gets around fine.