The Dragon Diamond was a strange diamond-like artifact that had been created for the sole purpose of keeping the malevolent spirit of the dark dragon Frazzn'korth within. The creation of the Dragon Diamond took the lives of all the sages who were involved in making it. The diamond's creation also sucked life out of the entire populace of Dar'Cenrath which was destroyed in the process and became known as the Ruined Kingdom.
The diamond's power was craved by many people and factions such as the archdemon Malakhia d'Zarnagon and the Order of the Black Rose, and all of them wished to release the dark dragon and use it as their slave for various nefarious purposes. However, they failed to release the imprisoned spirit of Frazzn'korth, and in the end Malakhia's spirit got trapped inside the diamond as well.
A few decades later a black mage named Zarnagon found the diamond and succeeded in figuring out how to use it. However, unlocking the diamond's power required several magical items as well as help from Izael Korath who was a direct descendant of one of the sages who had created the diamond. Zarnagon spent years solving the mystery of the diamond and was thwarted by Refan at every turn, but he eventually succeeded in releasing the spirits of Frazzn'korth and Malakhia with a bit of aid from Omaroch. Zarnagon fused with the two spirits of the diamond, giving birth to a being which would be known as the Godslayer.
The shards of the Dragon Diamond lay undisturbed in the ruins of Dar'Cenrath for years until Nesa Mikoto, who was travelling with a group of heroes led by Axikasha Keiran, accidentally discovered them in the year 11 AOE. He did not know the history of the shards, but he sensed powerful magic within them, so he took the shards in case he could use them someday. Nesa used some of the shards later to woo Rhylian Loras. Ironically this was the first time in a long while that the diamond had been used for something else than destruction.