Ruby's knife is a demon-killing blade of unknown origin, given to the Winchesters by the demon Ruby during Season 3. It is one of the few weapons capable of permanently killing a demon — not merely exorcising them but destroying the demonic essence entirely. The knife appears to be a standard-looking hunting knife with a distinctive dark blade.
Usage
Stabbing a demon with Ruby's knife kills the demon and, unfortunately, the human host as well. The blade glows orange or produces an electrical-like flash when it makes contact with a demon's essence. The kill is permanent — the demon does not return to Hell but is simply destroyed. This makes the knife more final than exorcism but also more problematic, as the host body is lost.
The knife is also effective against hellhounds and some other supernatural creatures, though it is primarily used as an anti-demon weapon.
Limitations
Very high-ranking demons can resist the knife's killing effect. Alastair was able to withstand being stabbed by it, as were some other powerful demons. The knife requires close combat range, making it dangerous to use against demons with strong telekinetic abilities who can disarm or restrain an attacker before they get close enough. The knife also kills the human host, which means it cannot be used to save a possessed person — exorcism is the only method for that.
Origins
The exact origin and construction of Ruby's knife was never explained on the show. Ruby simply had it and provided it to the Winchesters. Whether it was forged in Hell, created by some other means, or is an ancient artifact remains unknown. Its unique demon-killing property suggests it was made with specific intent, possibly using knowledge or materials available only to demons themselves.