The water of life was a red liquid that was researched by the Shinsengumi by order of the Bakofu clan.
It gave a person who drank it remarkable strength and healing abilities. In short, the only way to kill someone who drank the water of life is to pierce his heart or chop his head off; all other wounds inflicted on someone who had drank the water of life would heal instantly. However, it brought with it such suffering that a person would lose all sense of who he was.
The main scientist who worked on it was Chizuru's father, but later when he disappeared during a fire at the clinic where he worked, research on the medicine was halted for a time until Sannan rebooted research on it using notes left behind.
It all started in Kyoto when the Shinsengumi was looking for a clan to sponsor them. The man who took them in and provided funding for them, Serazowa Sensei, struck a deal with the Bakofu clan. The terms were that the Shinsengumi would research the Water of Life and in return the Bakofu would sponsor them.
The first version of the medicine had these effects: Instantly after drinking it, the person would lose his mind, his hair would turn white, and his eyes turned red. The test subject that it was administered to would go into a furry and a rage and begin attacking those near him and attempting to kill them. It was no use calming them or communicating with them.
Later, those who drank the medicine were called furies.
After developing it further and improving it, the medicine was given to a captured prisoner and the same effects were exhibited except for the fact that the person was able to keep his mind for a short time and was able to talk some before fully losing his mind and running away, where he then went on to murder someone in his blood lust, a side effect of the medicine. Another side effect was a burning throat which throbbed with extreme pain and agony.
Then, after more developing of the medicine, they were able to create a version of the Water of Life that allowed people to keep their mind and ability to reason. These people could have their blood lust and agony contained by taking a powdered herbal medicine. However, it was only a temporary fix, and the person (now a fury) would have to eventually take more of the herbal powder or give in to his thirst for blood. Also, a fury had to be kept away from blood, since the sight of blood would trigger his blood lust and make him go into furry "mode." (It is interesting to note that at this point, people are able to leave furry mode after either giving in to their desire for blood or by taking the herbal remedy.)
There was more research on it, until people were able to enter and leave furry mode at will, choosing when they use their fury powers and when they're normal. Side effects were now greatly reduced.
So where does this power come from? According to the scientists, this power is inside everyone, but the water of live would allow them to use their power up in larger amounts all at one time.