The Master Sword

From here.

 
Broken sword (d3 damage)
An ancient, filthy arming sword, shattered so that only a short stump of the blade remains. The party will find it in a chest of rotten wood and rusty iron, all other items within having long ago succumbed to the ages. It looks ruined at a glance, but should they examine it, they will notice the metal was once of extraordinarily quality and there are still some runes etched into it under the layers of grime.

A blacksmith or a dwarf would recognize it as a once magical blade, but far beyond their ability to repair. A wizard could detect the faint traces of magic hidden in the heart of the sword.

Neophyte sword (d6 damage)
If the PC who carries the sword performs a suitably heroic deed*, they will dream about an elven princess the next night. She will name the PC her champion and urge them to vanquish evil with the sword she grants them. On the next morning, the sword will be found mended and cleaned. The runes on its now restored blade read: Non timebo mala.

The sword can be unsheathed and used in a single action, plus it can be thrown with no penalties and the same range as a knife. The PC will be aware of this from the dream.

Adept sword (d8 damage)
Should the sword wielder follow the wishes of the princess, the sword will eventually** grow more ornate and feel more magical. When thrown, it can now be recalled back to hand as a free action. In addition, by concentrating on any creature the sword had cut in the past, the wielder can dowse the direction towards this creature.

However, any overtly evil action will cause the wielder nightmares of the princess being horrified and furious with their deeds. They must Save every night or receive only half the benefits from sleep, until they make amends or get rid of the sword. Should they persist in evil behaviour, a wild hunt of fey creatures will raid their camp one night and even if they survive the assault, the sword will be lost in the struggle.

Master sword (d10 damage)
A great quest or a deed of undeniable virtue will cause the sword to start glowing with a faint white light. It becomes capable of cutting through any magical protections, shattering force fields, ignoring damage reduction and striking true against intangible creatures.

The wielder will now frequently dream of the princess and her fairy realm, waking up well-rested and in a good mood. They ignore any conditions that would disrupt their sleep, unless they make the princess angry as above. Their ears become elvish in shape, if they were not already.

Grandmaster sword (d12 damage)
One night, the princess will confide in the wielder of the sword about a grave threat to her kingdom, and that only they may help. If they accept this grand quest, the sword will grow into unearthly beauty and brightness. The wielder will also be affected as per geas spell.

When thrown, the wielder may now opt to teleport to where the sword hits rather than recalling it back to them. Furthermore, once per session they may summon a pixie that will help them with any short, simple task. Note that the pixie is too small to fight or lift larger objects, and the same pixie is summoned every time, so treating it badly (especially getting it killed) will quickly turn it uncooperative.

If the wielder succeeds in the final quest and later dies or retires, they will disappear along with the sword. Should the players later travel to Faeria or encounter the wild hunt of the Fair Folk, one of the fey nobles will bear a striking resemblance to their lost comrade.
 

A bit like this.

  
*) At this first stage, anything that doesn't scream "greedy, selfish murderhobo" will do.
**) Likely once they reach the next level. Further stages should also follow roughly once per level.