To make the dream potion, the dream vial (empty) must be filled with water to create a Dream vial (water). The easiest way to fill the vial after obtaining it is in the house southwest of the bank on lunar isle. Next, add goutweed (either grown through farming or stolen at troll stronghold) to create a Dream vial (herb). Finally add ground astral rune (use a hammer on an astral rune, then crush the shards into dust with pestle and mortar) to complete the potion.
With the potion, Cyrisus and the player travel to Dreamland in Dream Mentor and sort out Cyrisus's fear of combat, where the player faces high-levelled monsters representing that fear.