Creation

When the Xavier Institute and it's entire student body and teaching staff were pulled into Limbo by Belasco, certain people were separated into certain groups, depending on which room they were in at the time.  The group consisting of Pixie, Blindfold, Anole, Rockslide, Wolf Cub, Loa and Gentle were placed outside of the main Limbo castle, and basically in the middle of nowhere.  They began fighting demons who attacked them, and were losing until Darkchilde ( Illyana Rasputin without a soul, who had been created by Belasco from her leftover essence) slayed the final demons.  To defeat Belasco and return them to their friends, Darkchilde needed a weapon, a Soulsword, but she had lost her's, and she needed to create a new one: from Pixie's soul.  The reason that Pixie's soul was chosen was because it was the most innocent of all the children, and to stop her friends from getting hurt, Pixie agreed to the deal.  The others were trapped in rock while the sword was being created.  Luckily, Anole who's arm was earlier chopped off, regrew a new more powerful arm and was able to break the bonds of rock (he broke free because it was obvious that Pixie was getting hurt).  Darkchilde is only able to get one bloodstone of what is needed, and therefore the Souldagger was created and not a Soulsword.  As she goes to attack the students, Rockslide (who had been destroyed earlier(by himself)) reforms out of Limbo rock and beats Darkchilde until she agrees to help them get back to their friends, and the only way she is able to do this is by teaching Pixie a spell, a teleportation spell.  Pixie uses the spell to get them into Belasco's castle, and there she stabs him with her Souldagger, weakening him, allowing Darkchilde to defeat him.

An Effective Weapon

Pixie currently uses her Souldagger regularly during combat; recent examples being were she stabbed Omega Sentinel with it, purging the villain Malice out of her body and her stabbing/slaying one of the N'Garai with it.  Using her Souldagger and in general, Pixie can perform magic, although at this time she only knows one spell ( the teleportation spell taught to her by Darkchilde). 
 
She also used the Souldagger during the events of Second Coming when she traveled to Limbo to rescue Illyana Rasputin. She used it and Illyana's Soulsword against Gambit while he was in is Death persona to cut off the hold Limbo had upon him.

Abilities

The Souldagger has been seen to possess some certain abilities/is able to do certain things that the Soulsword could.