Holy water is a weapon that hunters often use to fight demons. Despite making its first appearance in Season 1, it is not frequently used until Season 3. It is common for hunters to carry a silver bottle of holy water with them.
Holy water cannot kill a demon, but it can hurt and burn it. This allows hunters to interrogate demons for information, or distract them long enough to kill or exorcise them properly.
Holy water is created by blessing a source of water with a rosary in hand. Once the chant is complete, the rosary is dropped into the water, and it becomes holy water.
Holy water was first used in Phantom Traveler, when the first demon appeared on the show. A demon was making planes crash, so Sam and Dean hopped on a plane to exorcise it. Dean managed to sneak the holy water past security. They figured out that the co-pilot was possessed and trapped him in the back of the plane. Then, they used the holy water on him, which burned the demon and caused him pain.
TestsEditHunters also use holy water on each other to check if the other is possessed. A great example of this is Bobby. In Devil's Trap, he first gives Dean holy water, before liquor. In Born Under A Bad Sign, he slips holy water into "Sam's" drink, which hurts "Sam". In Lazarus Rising, when Dean returns from Hell, Bobby splashes some holy water in his face for safe measure. After performing the Demon Curing Ritual, Father Max Thompson and Sam used holy water to test the demon possessing Peter Kent and Dean were human again.
Holy water seems to be one of the best defences against demons as, of all the demons, Azazel and (as per Ruby) Lilith are the only ones known to be immune to holy water. It has even been proven somewhat effective against other very powerful demons such as the current King of Hell, Crowley, Abaddon, and Alastair. To Alastair, however, holy water only caused a moderate amount of pain - it alone would not impair him in a battle. And Crowley, though more tormented by it, has shown that he can recover from its burn faster than the average demon. Dean was also only affected for a few moments while a Knight of Hell.
The Seven Deadly Sins were also quite resilient and were able to endure great amounts of holy water, better than most demons.