You get the recipe for Damascus by doing quests in the hunter village. You're looking for a specific recipe called the "Damascus Billet". This lets you forge Iron and Steel together to make Damascus!
That's it :)

The alternative way is to melt down something that's made of Damascus, like the helmet you get from a chest in the cave with the monster. You'll have to get past the cave to reach the hunter village anyway, so you might already have the helmet! From there you can duplicate your Damascus bars in the smelter (there's another guide on steam, as well as several discussions on this exploit). Of course, this isn't the intended method, but it certainly works! :P