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Upon entering the The Shadow Fort go down the hole to the right of the front door of the main keep. This will lead to the Frontier Caverns beneath the Shadow Fort. Slay all the Goblins and Hobgoblins within to reach the Proving Grounds. A cutscene will show the Hydra unleashed by Goblins.
Slay the Hydra to complete the quest.
Refer to the Hydra page for tactical advice.