"There is a wizard named Velore who lives underground, in the forest East of town. He can help you create a powerful, magical item that will help you on your journey. Follow your compass into the forest East of here, find the entrance to Velore's home, and speak with him before returning to me."
Use your compass to guide you into the forest and locate Velore's home. Head down the spiral staircase and speak with Velore. King Xero's quest will complete as you enter his home, but it would be wise to complete Velore's quest so that you may obtain the Horadric Cube. Velore will craft one for you, but in order to do so, he will ask you for certain items: 1 emerald, 1 redstone dust, 1 gold ingot, and 1 stone brick. Once crafted, it will appear in your inventory. For the next quest from King Xero, return to /warp throne.