Properly using the chalice is the climax of the Waterfall Quest. Warning: Players who attempt to "Take treasure Chalice of Eternity" (right click option) without following the proper procedure in the quest will be washed out of the cavern. They will also lose glarial's amulet and glarial's urn. (Both can be retrieved from glarial's Tomb. The amulet is required to enter the dungeon; the urn is used with the chalice in the quest.)
In Biohazard, King Lathas claims that his brother, King Tyras, was corrupted because the Dark Lord forced him to drink from the Chalice. This is a Chekhov's gun hinting towards the connection of the Plague City storyline and the elves, which was revealed in Regicide quest.