Dagger Island is an island that Sly and the gang travel to in Episode 5: Dead Men Tell No Tales of Sly 3: Honor Among Thieves. The island itself is one of the two geographical regions of Blood Bath Bay and is where the diving gear of Reme Lousteau was stolen and buried by Black Spot Pete and Cantankerous Tim.
Sly, with the help of his friends, were able to recover Reme's diving gear and allowed Dimitri to obtain his grandfather's heirloom which he then uses during the diving sections found later in the chapter, and to help retrieve Sly's cane during the final Episode. To do this, you use the Treasure Map, in which there is an in-game tutorial.
After finding Dimitri's grandfather's Diving Gear, They are greeted by Captain LeFwee and 2 of his Pirate Dogs, Penelope ends up being taken Hostage by them leading to later missions in the game.
The enemies that can be found on Dagger Island are purple near sighted lizards and pirate dogs.