The Demon Dagger is a Ranger subpath item. 
The dagger is a reasonably good pre-Wasabi hand item. It offers good protection to those wearing it.
History
The Legend of the Demon Dagger
It was a dark and stormy night, with a blinding snow so thick that separation an arm's length meant that one could lose a companion to the blizzard. Spectrumboy and I had tarried too long at the gem cutter's hut, trying to perfect the cut to one more stone. As we left, shoulder to shoulder, both for warmth, and for fear of becoming lost, we moved toward the circle, only to be blown back by a fierce wind.
Soon, it was apparent that we would not reach the circle, so, we sought shelter. There appeared a wall before us. Searching over it with our hands, we found a door, all but knocked from its hinges by the storm. We pushed our way in.
Inside, the earthen floor smelled dank, but, the door, when we pushed it back into the opening, kept most of the wind and snow from our faces. The room, very small, was much as one would expect a disused hut to be. There were cobwebs everywhere. The walls and ceiling were battered, but, anything was better than what was outside.
Near the rear wall was what looked like a door on the floor, but, there was no corresponding entrance way cut in the wall, so we thought to use the wood planks to build a small fire. When we lifted the door, there beneath it was an opening. A tunnel! But, dirt had sifted into it, and the passage was not nearly big enough for either of us to pass through it. We set about digging with our hands, and later with our swords and a broken part of the door. Our efforts made us warmer than a fire would have, such was our curiosity.
Soon, we had a passable passage, which lead into a great opening, underground, yet, somehow not. And, it was warm there. A stream ran both to the south and north of a great circle of trees, which opened onto a gate. Beyond the gate was what appeared to be an outdoor arena.
Hidden to one side, we found the remnants of a forge, and strange letterings on the forge.
After the storm died down, and we returned to the circle, we gathered several Rangers and again found our way through the snow to the hut, and to the forge. Through trial and error, and research into the books found earlier, we were able to decode the message.
It told of a dagger which could be forged from metals and infused with powers of a demon. Thus, was "born" the Demon Dagger. This rare item, though wrought by Rangers is shared with the kingdom though games and event prizes.
Well, that's the story, as I remember it. Perhaps, it was the delusions of one too tired from fighting a blizzard. Perhaps, it was but a dream of mine, but, all I know is, the Demon Dagger is made by Rangers. As for how much of the power of the demon it holds...well...that's what legends are for...
Ranger founder Angelica
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This particular piece of equipment's origin is as much a mystery to the Rangers as it is to the general public. The secret of how to forge such a dagger is only known to the Elder of the Rangers and the Ranger Path's most trusted walkers. Essentially though, the Demon Dagger has become the survival knife of the Rangers over the years, though we do share a few with the community every now and then. That is, if they prove themselves worthy enough for such a prize.