Actually, true Damascus steel in not folded and welded, rather true damascus steel as invented in india, was smelted as an ingot, and worked from the ingot. What most people think of as damascus steel is actually and correctly termed "pattern welded" steel, and is made from a process of stacking two or more different types of steel, or wrought iron, then forge welded, and manipulated in different ways to give different patterns. It can be folded, twisted, drilled, filed, and manipulated in any number of ways prior to the series of welds, to give it various patterns. The purpose of acid etching is to eat away at the differing steels and thus reveal the pattern of the layers, and this is separate from color treating, or hardening.
Another name for true damascus steel is "Wootz steel" here is a little article about using wootz to make a blade. http://www.vikingsword.com/ethsword/pat05.html