Star Pieces are found when stars fall to the ground. When a star falls, it makes a very loud "falling" sound (a drawn-out 'wheee' that lowers in pitch) and a crash when it lands; they will then be apparent from a distance by bright rays of light. Walking over the fallen star soon after it lands will give you a star piece and one level of XP. 9 star pieces can be crafted into a Starstone and some experience. Roughly one star falls every few nights.
Stars cannot be "extinguished" by falling into water – they can still be collected.
If the star piece is left for a few seconds and still retrieved before it disappears, it will only give you stardust.
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