Pre-Crisis:

The Dreamstone was Doctor Destiny's criminal weapon, dubbed the Materioptikon sometimes, after the reality-altering machines Destiny had created in tandem with the stone, which itself was his masterpiece. Though it could be destroyed and confiscated, Destiny's own mind was capable of bringing back another from his dreams given the nature of the stone and how deeply it was rooted in dreams and to Destiny. Thus the JLA attempted to destroy the good Doctor's dreams, by employing a psychiatrist to block Destiny's ability to dream, triggering the transformation into the skeletal being he later became. He nonetheless was able to create several with his massive intellect, and brought online or constructed several more Materioptikons even when his ability to dream was impaired.

Post-Crisis:

Dream of the Endless created the ruby from the fabric of his being long ago. Powered by his spirit it was made to manipulate the fabric of dreams, the Dreaming itself, the world where Dream rules. The ruby seems to turn dreams into matter. It forces them to translate themselves into forms unrecognizable. This ruby also controls dreams in their raw state. When Dream was imprisoned by Roderick Burgess, the stone, along with his helm and bag of sand, were confiscated by Burgess and later stolen by Ruthven Sykes. Sykes himself would suffer the burglary of the stone when his lover, Ethel Cripps, stole it. Years later, Cripps would freely hand over the stone in Arkham Asylum to her imprisoned son so he could use its power to escape. This son was Doctor John Dee, also known as Doctor Destiny. In this iteration, Destiny's state was caused by his own over-usage of the stone, causing him to lose touch with reality and cease eating, shriveling to the waste of a man.

People think dreams aren't real because they aren't made of matter, of particles. But Dr. Destiny realized that dreams are real, but they are made of viewpoints, of images, of memories and puns and lost hopes. Dr. Destiny built reality-altering machines powered by the ruby. Then he rebuilt those same machines in his dreams. But this stopped him from dreaming, so he uses the ruby directly, coding the circuitry into its clasp. He changed its resonance, he irradiated it, he forced flaws, he isolated it from its original power source. He made it more real and less connected to Dream. He made his one of the most powerful bridges between the waking world and the Dreaming. He intended use the ruby to drive the world mad, and sent it into people's deepest dreams, to dredge up the blackness from their souls.

When Dream confronted Dr. Destiny, he told him the Dreamstone was not made for that. If Dr. Destiny reversed what he had done to the jewel, Dream would use its energies to repair the damage done to the world. He said the ruby contained too much of him in its fabric. Dr. Destiny had robbed Dream of his power, and thus the Endless was no longer strong enough to repair the havoc alone. Dr. Destiny laughed, refusing and attempting to kill Dream. Dream then garbed himself for battle and transported both into his own realm of the Dreaming. Dr. Destiny chased Dreamlord into his realm, one he intended to take as his own. While battling Dream, Dr. Destiny destroyed the ruby, believing that if he did so, Dream would die. By destroying it, instead he released the power stored in it, including power the Lord of Dreams had existed without for millennia and he had forgotten. Dream's control of the Dreaming was absolute again.

Yet Doctor Destiny was not done. Using his own ingenuity and resources, he has been creating other Dreamstones based upon what he had learnt of the original one. His stones, however, appear to be no less powerful, with only extremely strong beings capable of escaping their grasp. One in particular holds part of Doctor Destiny's dreamself, a full, shining ruby. Destiny's Dreamstones are different in subtle ways from Dream's original, and can hold the power to create alternate universes from the dreams and fragments of the minds of those subjugated by its power they devour, as proved by the Red King and his Parallels. One alone, coupled with Destiny's knowledge and will, was able to subjugate nearly the fullness of Earth's population, including most of the JLA.