This is "so DnD" - the lore is decently written, but the whole "weapon made to stop the greatest foe" approach has been used too often and is made only slightly better by having been made by two working in unison.
Also, it's a sword. With a dragon inside. That turns you into a dragon. I know Dungeons and Dragons is supposed to be about as much about dragons as it is about dungeons, but overdoing it with the dragons may lead to diluting their dragony awesomeness and making them less special (been there, done it).
This said, the sword can be a good McGuffin; I'd have included a limiting clause though or some sort of drawback which makes players less inclined to keep it after they down the Big Nasty.
Another note: the bargain Lord Brax struck with the dragon could have actually borne the seeds of his demise - you write he had the power to claim the soul of the dragon - so the dragon in turn should possess the "power, strength, endurance, and knowledge" to defeat him, in turn. Hence, the dragon-turned-blade could indeed be fed a stream of thought betraying the villain's plans or next strike in that battle (knowledge), drain him of vigor feeding its weilder and striking true as defensive enchantments woven by Lord Brax fail miserably to deflect this one weapon.
Also, welcome to the citadel.
You could go with a spring mechanism, with a winch to draw back a hideously strong metal coil... or you could make it a Gauss crossbow, propelling the bolt along the barrel with whatever technobabble strieks your fancy.
Also, I don't think fletching per se has to impart a spin on the arrow, it ensures that the arrow does not tumble.
As it is, the technological solution does not make too much sense.
On a different note - you can really go way out there: what if the bolts are magnetic - and coincidentally, the magic used to enhance the armors of the cavalry improves all the properties of the metal, including attracting magnets, disproportionately so?
Reminds me of a tale by... Gaiman, methinks. Anyways, exceedingly well written. The sole objection is that the Judge's punishments are a little literal.
You might want to edit out a few mistakes, such as the second plot hook lacking "hero" in the first line (A great ... has been etc.)
A well-deserved 5, I'd say.
It's rather interesting, this one!
Perhaps slightly altered, you could leave with something of *true* worth, but not with stuff collected out of greed.
Also, if PCs bother to research a little, they may leave their equipment behind, stored, sail to the Avaricious, and reclaim their stuff upon return! If they don't inquire... well, they should have!
The trash golems and the pale keepers need to be elaborated, though.
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Simply put, this is an elaboration on the basic DnD setting, which cannot be blamed for excess ingenuity. Don't take this the wrong way, but I'd like to see something new, special... and the basic DnD halflings have their own chapter in the... Races of... Destiny? Or races of the Wild, or whatever. So, my 0.02$ would be - if you write them up, you may as well make them something special. As for a race/culture write-up in general, go to greater breadth, depth and allocate space to topics according to story potential and importnace. So far, you may consider it a finished product, but not one I'd a) use b) rate highly.