I had a hollow-bladed 'rambo knife' when I was a kid. It sucked - the hollow made the handle weak and easily broken.
The idea of a knife of storing is not a bad idea, but as moon has said, the presentation needs work.
Spellcheck is needed on this, see "To retrieve soemthing from the space, the user reaches into the space just like a bag of holding, but thier arm is shrunk to fit inside the handle." for two typos in one sentance, not to mention the typo in the summary text.
A lot of unanswered 'whys' and coincidences here, along with a massive escalation from investigating a mystery to a campaign-shaping event. There are neat details and it would a great base to work from.
I like this item - and an item that delivers small volumes of magic liquid effectively twice a week is not that overpowered, unless there are some extraordinary liquids available in your universe. If it said 'potion' instead of 'liquid' then this puts an implicit limitation on its power. A powerful item, yes, but not overwhelming.
Cool item. If I may comment on the Rolemaster question on slam.
Just treat them allowing a Huge Bash attack with an OB set to your desire. Given the downsides on the item, a +30 OB may be fine.
The weight penalty would be like carrying 40 lbs of weight (20 lbs per glove).
As this is inorganic matter, this will cause problems for some casters :)
The crumble attack could be a medium bash using thrown spear range. Go to Comment
Wow, this shield has a rather dramatic side effect.
I'd suggest the following:
When the shield catches arrows in this manner, it stores the damage and slows dissipates it while the shield is held. If taken off before the energies have dissipated, then the bearer takes the damage. Rate of dissipation of course is left to the GM, say 1 hour per arrow.