Io start this quest you must be at least 16 level. When you reach the appropriate level go to Lance Silversmith (located in a house east from Goblin camp). Say Demonblade and he will ask for:

1 Scroll of Enchantment from the Enchantment Scroll quest. 1 Chaotic Sword from the Chaotic Sword quest, also dropped by Dune Raiders. 1 Demon Skull, dropped by Griroesh. 1 Necklace of the Black Heart, dropped by Bane Blackblood. 8.000 gold pieces

Also, consult the items chart for more information and drops

When you collect the above items, go back to Lance Silversmith and say Make Demonblade.

Note: You can do this quest as many times as you want.

Quest Reward Synopsis: Demonblade (213 Str)