The ruby-hilted dagger is an artifact of Shadar Logoth; like all things from that city, it is contaminated with the evil that consumed the residents and will pass on the madness to whoever carries it.
With Matrim CauthonEdit
Matrim Cauthon initially carried the dagger from the city when he and Rand al'Thor and Perrin Aybara met Mordeth as an "old man" who claimed to have found treasure. Mat's acquisition was not discovered for several days, by which time he and Rand had been separated from the group, and paranoia had already begun to sink into Mat's personality. They made it to Caemlyn despite this and took up residence in Basel Gill's inn, where Moiraine Sedai caught up with them and discovered the dagger's presence and significance. She was able to protect him somewhat from the taint, but could not separate him from it without killing him (and indeed, he tried to kill her on sight, but was stopped by Lan Mandragoran). The simplest scratch from the dagger brings a rapid festering, skin-blackening death within seconds unless Healing is immediately applied, and sometimes even then it is not enough.
Mat and the dagger traveled to Fal Dara, where a ritual was done to further insulate him from the dagger's taint. Even still, he was not completely separated from it, which would require access to the angreal in the White Tower. However a complication arose at this time: Padan Fain, having merged with Mordeth, was anxious to recover the dagger, and stole it along with the Horn of Valere.
Mat's bond to the missing dagger weakened him, but also allowed him to pursue Fain, and eventually both artifacts were recovered. Mat finally traveled to Tar Valon and the White Tower on a litter, having been weakened by his long separation from the dagger. A healing ceremony there finally cut his ties to the evil of Shadar Logoth, and the dagger was sealed in a locked chest deep in the Tower's basements.
The sheath of the dagger has some adventures in the early books. It first appears in Mat's hands on the deck of the Spray in TEOTW Ch. 24 p. 342, described as "a gold scabbard worked in strange symbols." TGH Ch. 11 p. 198, Padan Fain unsheathes the dagged before setting it on the chest containing the Horn of Valere. When Rand takes it in Ch. 19 p. 292, the blade is said to be still bare, as it evidently is in Ch. 45 p. 636 when Mat slashes the hand of a Seanchan soldier. However, in TDR Ch. 10 p. 137, Mat is clutching the sheathed dagger in his hand.
With Padan FainEdit
Padan Fain came to the White Tower in search of the dagger, however, and recovered it, killing an Accepted in the process. Having the dagger amplified Fain's dangerousness and evil tendencies, and may have accelerated his madness, whereby he now shifted freely between thinking of himself as Fain, Mordeth, Ordeith, and other personalities, and his accent switched between his native Lugarder and an older, more refined voice.
Fain has used the dagger's dangerous poison to slash his way through obstacles and intimidate his enemies, both of the Shadow and the Light, ever since. He even wounded Rand al'Thor, the Dragon Reborn, during a battle in the rebel camp south of Cairhien. Only the combined efforts of Asha'man and Aes Sedai Healing prevented it from killing him.
When Fain was killed by Mat at Shayol Ghul, the dagger melted away into his own melting corpse, with Mat refusing to pick it up again shortly beforehand, judging it to be one bet he would not take.