While none agree where the scabbard of sharpening originated from, the most commonly heard tale involves a traveling merchant named Otto Von Smythe. Otto was a gnomish merchant (according to most versions of the story) who sold a variety of bladed weapons, some of more dubious quality than others. As a way to upsell customers on less than masterful blades he had a special scabbard constructed that would sharpen any blade placed within it.
According to most stories Otto would appear as a traveling merchant selling odds and ends along with a single blade of exquisite sharpness, albeit without a scabbard. The way the con worked was by storing an ordinary blade in the scabbard and then removing it ahead of time for displaying. The blade would have an unbelievably sharp edge that would be demonstrated by cutting squishy fruits or planning thin wisps of paper off of a short plank.
After selling a blade he would quickly depart the area, knowing full well that the enchantment was only temporary. It is assumed that his short legs only took him so far before one of his customers caught up to him and beat him senseless with a dull sword.
Major power: The scabbard functions as a magical sharpening stone. Any non-magical bladed weapon from dagger to greatsword can be sheathed within it. Upon doing so the blade will lock in place (no amount of strength can extract it until the magic takes effect) for one to ten minutes. During this time the scabbard will gently hum and vibrate.
Once the allotted time has elapsed the hilt will retract an inch from the scabbard and it can be removed as a free action. At this time the blade will be dangerously sharp and have a damage bonus equivalent to the number of minutes it was locked in the scabbard (five minutes equals +5 damage bonus). No bonus on to hit is granted by the scabbard, only damage.
Every round the weapon is used in combat it will degrade by one point until it reaches a penalty equivalent to its most recent bonus. If it is not used in combat it will degrade by one point every 24 hours in the same fashion. Using the scabbard again will restart the entire process and grant a new bonus.
If the scabbard is unavailable only a skilled blacksmith will be able to reverse the effect on the weapon, taking a number of hours equivalent to the penalty to repair.