What's the best steel for a utility blade, and the best way to sharpen it?

I'm not a knife expert but I don't believe there's a lot of decent utility knives that are key chain sized. If your not using them in a demanding way that requires a lot of force and pressure you should be fine, but otherwise i would recommend getting a folding knife that has a clip. That way you can get a blade that's 2-4 inches, maybe serrated as well. It will also still be convenient because it still does not take much room and it won't add bulk to your keys. In fact, it would be easier if your knife clips into/onto your pockets, belts, waistband, etc because it's easy to just pull out and flick open with one hand. There's a lot of good knives like kershaw that will do. (and yes, they also make keychain ones.)