What did Dally use Two-bit's blade for?

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I think you are talking about what happens in Chapter 7 and Chapter 9.  In Chapter 9, we are told what Dally uses Two-bit's blade for.  Dally tells Pony that he used the blade to "persuade" the nurse to let him out of the hospital so that he could be a part of the rumble that happens in that chapter.  Dally leaves the hospital and joins the rumble.  He tells Pony how he got out as they are fighting some Socs.

We see Two-bit giving Dally the knife in Chapter 7.  He gives it to Dally even though it is his most prized possession.

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