The Dream Nail is required to beat Hollow Knight as well as get the True Ending. This item will make it so you can unlock hidden dialogue, fight dream bosses to collect essence, gain soul from enemies and release the three dreamers to beat the game.
How to find Dream Nail
Make your way into the Crystal Peak. In order to get into Crystal Peak you will need Desolate Dive or the Lumafly Lantern.
From the lower bench in Crystal Peak jump up to the top of the room and head to the right.
This will lead you into a dark room where you will need the Lumafly Lantern. Keep heading to the right.
Once you get to an opening jump down. Note that if you have Crystal Heart and dash across the opening you will find the Descending Dark upgrade to the Descending Dark spell.
Once on the ground level, head to the left and you will find a shrine that will give you the Dream Nail
What is next?
With the Dream nail you can start going after the Dreamers located on your map to beat Hollow Knight. In order to get the “Good” endings in Hollow Knight you will need to take down the Dream Warriors and Dream Bosses to collect essence.
With 1,800 essence the Seer will give you the Awoken Dream Nail used to acquire one half of the King’s Soul Charm. The King’s Soul charm will later get upgraded for the “Good” ending.