Answer:
You sheath a knife.
The verb, sheath, means to cover a knife blade, or the whole knife, with a sheath.
The verb, sheathing, means putting the knife into a sheath; the knife is then sheathed (adjective).
The noun, sheath, in this context, is a cover, usually fitted, made for carrying a knife or other kind of bladed implement.
The verb, sheaf, means to gather (things) and bind or collect (them) into a bundle: 'a sheaf of papers'.
The noun, sheaf, is the bundle of things which you've sheafed (adjective) by sheafing (verb) them.