This quest is available after completing the quest: Friend of the Frogs, and is available starting Chapter 4. However, it is not available during the Epilogue for reasons revealed at the time. After the Epilogue, he will be on the north-eastern dock.
Dive into the water, anywhere is fine, swim to near the east gate, and there should be a ladder nearby, Climb the two ladders and then talk to the elderly man. He will give you a Dragon Skin upon meeting him. He will also tell you that he will give you a prize on how many times you:
1. Bumped into people on the streets
2. Banged your head on signboards
3. Fell down/slipped on something