A great white gem, discovered by Thrain I beneath the mountain of Erebor. It was also known as the Heart of the Mountain. The Arkenstone shone with its own light, and sparkled when outside light hit it. Its recovery from the hoard of the dragon Smaug forms the tale recounted in The Hobbit

When Smaug drove the dwarves from Erebor in TA 2770 the Arkenstone became part of his hoard and languished there until Thorin and Company recruited Bilbo Baggins and went in search of it. Bilbo found it, and described it as small enough to hold in his hand but too big for him to close his fingers. He kept his discovery a secret, and gave the gem to Bard the Bowman and Thranduil, the Elvenking, to help them bargain with Thorin.

After the Battle of Five Armies, in TA 2941 Thorin Oakenshield was buried beneath the mountain with his sword, Orcrist, and the Arkenstone laid upon his breast.

Editor’s Note: For comparison, a gem of the size Bilbo described is set in the head of the sceptre of England. It is part of the famous Cullinan Diamond which was found in 1902, in South Africa. It weighed more than half a kilo uncut.
Encyclopedia entry originally written by pipsqueak