Warmweed was a drug used by the Skandians to make the slaves work harder and also is used by the head slavers to subdue the more rebellious of the slaves, as shown by Egon when he gets a slave to give the drug to Will after he is assigned to the Paddles, a torturous form of work.
Since Skandia was extremely cold, and the slaves didn't have enough warmth, the Skandians had to look for a solution. It was a piece of plant that warmed a person up for a while, but also building up a physical and mental dependence at the same time. After a few doses of warmweed, a person becomes completely addicted. Normally, people addicted to warmweed don't care about anything, do whatever they are told, and only wait for more warmweed. It is, however, possible to become cured of the addiction. At increasing intervals, and decreasing doses, another person must feed the addicted one. Gradually, the addicted person will become more human, and will return to normal.
Warmweed has medicinal purposes and Will uses an elixir with it in it to help heal Tug in the Wolf, a short story from the Lost Stories. Will also uses it in Halt's Peril to try and help Halt combat the Genovesan poison. This is made especially apparent when Flanagan mentions that Will has flashbacks of his time in Skandia whenever he smells the vapors of the ointment.