The Dagger of Sacrifice is used to sacrifice creatures for Life Essence. The amount varies per creature and can be further increased through the use of Runes of Sacrifice.
The Dagger of Sacrifice must be used within about three blocks of the Blood Altar. When used on a valid target, the target will instantly be killed and its Life Essence will be drained into the altar. Creatures that are considered children cannot be sacrificed. The amount of essence varies per creature:
Do note, however, that the Dagger only acts as a weapon when in range of the altar. Otherwise, it will be no more effective in killing mobs, and their Life Essence will not be transferred to an altar.