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They had no idea it was a dagger when they found it in the primeval thaig. It looked like an idol with figures carved from red lyrium.
"Didn't want to stare at it too long," Varric once said. "Felt like it was staring back." His brother, Bartrand, kept the idol for himself, and probably stared at it much too long. When he felt his sanity slipping, Bartrand sold the idol to Knight-Commander Meredith of Kirkwall, who forged the idol into a blade. It didn't end well for her.
The idol remained lodged in Meredith's petrified remains until it was removed some years ago, presumably by Solas, and restored to its original form. That's when we learned about the idol's connection to the elven gods.
Solas used the lyrium dagger to create the Veil, and he's going to use it to bring the Veil down.