Lye is a strong alkali that is used in soap making, among other things. It is also known as caustic soda or sodium hydroxide. The ingredients for making lye are wood ash and water. Preferably rain water, as it is soft, although tap water will work just as well. The ash should come from hardwoods as soft woods are too resinous to mix with fat. Only certain woods are good for homemade lye. You will need hardwoods, not softwoods such as Fir or Pine. The following common hardwoods can be used, along with all other hardwoods: Hickory, Sugar Maple, Ash, Beech and Buckeye wood give better results.
Take an old wine barrel and make sure that it is clean. Steaming it will give good results. Elevate it so that you can then place a bucket or similar underneath the leaching hole at the bottom of your barrel to collect the lye water when it is ready to emerge.
Place a bung in any existing opening in the wine barrel, and drill a smaller hole into the barrel that is only 1/8th inch wide. What you are aiming for is a hole wide enough for the water to drip through but small enough for the ashes not to fall out. Keep this hole closed up with a small bung until later.
Now pack the bottom of the barrel with clean river stones. Make sure that you get a good mix of both large and small stones as this will work as a filtration system. If you don't have stones, you can also use a thick layer of charcoal instead.
After a good layer of stones you will need to place a generous layer of straw on the top of the stones. Your straw should take up at least half way up the barrel.
Shovel in your ashes until the barrel is as full as you want it. After that, pour over some hot rain water in small amounts so that the whole contents are wet and soaking but not flooding. Using hot water is important as the hot water will draw out more potash from the wood ash than cold water, making your lye stronger.
Traditionally, a little lime was mixed with the ashes to 2 - 5% which then guaranteed that you would have good lye for soap making.
On day 2 you can add more ash and water after allowing the ash from the previous day to settle.
Source: http://www.countryfarm-lifestyles.com/make-lye.html#.WsXuji-B2t8