I had a lot of people ask me about this. The Ancestral Forge is located to the left of the blacksmith in Pokari. It's that giant pot-looking thing. It can be used to improve many things such as pets, armor, mounts, etc. It is also used for collecting soulstones from armor.
Functions available:
1. Imbue Elements: Requires one piece of armor and two Element Scrolls.
2. Refinery:Melds two Gems into a superior quality gem with Smithery Goo.
3. Soul Charge:Allows you to move the soul from armor into empty Soulstones.