The Palace of Paroxysmus is a large system of caves that runs beneath the Lost Lands.
Through the caves runs an large river of highly corrosive acid, which ends in a large lake with an island in the middle. If you are able to gain access to the island, you will have gained an audience with the ruler of this twisted place, Chief Paroxysmus. The Chief doesn't like visitors too much though.
In order to enter the dungeon you must have an Acid Proof rope in your backpack, this rope can either be crafted or bought from the NPC standing outside the dungeon.