The keyblade is used in Elemental Workshop IV quest. It can be created by using a knife on the whetstone on the ground floor (surface) of the workshop building, with a Notched book in the inventory. It is used to open the doors at the southern end of the deepest level of the elemental workshop. Upon opening the doors the keyblade disappears from your inventory and the door is permanently opened.
You can obtain another keyblade by using a knife on the whetstone in the ground floor of the workshop building, with a Notched book in your inventory. However, you cannot make another once the quest is complete.