To make less potent.
Originally, this was a product line of foam based toys for children. It was adopted by the online gaming community to refer to the reduction in power of a game feature for the sake of balance.
This term is now seeing more widespread generic usage, usually in reference to mechanical devices, or personal powers within a business framework.
antonyms: Buff(v), Spike(v)
Did you hear that Henley got Nerfed?? It's probably because he handled the Parker account so poorly.
John had gotten himself a new Nerf blaster, confident that the office would not be safe to walk through without being pierced by darts again.