I get this question sometimes with customers who order leather sheaths with their knives. Early on in my knife making career I took a class with the legendary Steve Schwarzer. I got extremely confused when he started to heat up a big container of wax. Once the wax was hot enough, some where around 250 degrees Fahrenheit, he dipped his leather sheath into the hot wax. I could see bubbles from the sheath as hot wax penetrated the fibers of the leather. Once Steve pulled out the leather sheath and wiped off any excess wax the sheath was soft and pliable. He then inserted the blade into the sheath and formed around the knife almost like kydex. After this process the sheath is almost completely preserved. Its difficult to get all the wax from the inside of the sheath so there is some excess on the inside that you may see at first when pulling your knife from the sheath. So that's what the hell is on your knife.