The Lantern is an essential item Link can acquire during his quest from Coro who warns the hero of the dangers up ahead noting the light from the flame will help illuminate dark areas. This item is primarily used to light torches which make hidden chests appear, activate staircases, and burn spider webs blocking passages in caves and the Forest Temple.
After coming back to Faron Woods a purple mist permeates the air which is toxic when inhaled but if the hero swings the lantern the toxic air will be temporarily dispersed away from the hero allowing safe travel to North Faron were the Forest Temple's entrance rests.
The lantern is an interesting item that it can be carried on Links person while holding onto another item allowing for easier combat in dark areas and it can be held onto when crawling. The lantern is fueled by oil and will eventually extinguish should the oil run out although the hero can prevent this by having a bottle of oil on hand or by using the lantern as a pseudo bottle scooping Tril's oil or yellow Chu Jelly.
When the player has the lantern in there possession it becomes possible to buy oil refills at shops although oddly this does not work in Castle Town.
Interestingly golden bugs are attracted by the lanterns light and will fly off and go toward the hero so long as they have wings.