The grinding wheel is used as an upgrade for the forge.
It is one of the two upgrades to the forge that does not use metal ingots, and thus can be taken through a portal. (The other is the bellows.)
Building[]
The grinding wheel is unlocked after acquiring iron and a sharpening stone.
Provided that the player has a stonecutter to craft the sharpening stone, the materials for a grinding wheel are fairly common and easy to acquire: five stone, 25 wood. Otherwise, a sharpening stone can be found occasionally in chests in the Plains.