I slept with my advisor's daughter and she is blackmailing me now. What can I do?
First off, you haven’t committed a crime (assuming she was above the age of consent) and you haven’t engaged in academic misconduct (since there is only an indirect academic relationship between you). However, the fact that she is threatening/blackmailing you is very concerning. The fact that she is your advisor’s daughter makes things more complicated, but being threatened or blackmailed by a sexual partner would be deeply concerning in any circumstance.

I do not know the exact nature of the threats or blackmail, but I would not engage in a relationship with someone who is threatening or blackmailing me. Only you know the exact situation, but your choice of words rings alarm bells. My primary concern in your situation would be worrying about whether she will make worse threats — e.g., false rape accusations. That would be much worse than a spat with your advisor.

If I were in your situation, I would try to record my conversations with her so that I have some evidence to protect myself if she does carry out her threats. Save text messages and get a voice recorder app on your phone. (Check the laws on recording conversations in your state first.) The only thing other than “he said, she said” you have to defend yourself is such evidence.

Maybe I'm misreading the situation from your question, but your choice of words "threatening" and "blackmail" is concerning. And there is no harm in trying to protect yourself from possible future accusations. Hope for the best, plan for the worst.

This is not a complete answer, but I think you should worry about being threatened/blackmailed before you worry about dealing with your advisor.

In terms of dealing with your advisor, two (conflicting) points: Generally, honesty is the best policy (as Buffy's answer emphasizes), but she is an adult and her father has no automatic "right" to know about her sex life, and there is a good chance both of you would prefer him not to know (as Nicole's answer suggests).

In terms of dealing with her: It sounds like you are still on speaking terms with her and you should absolutely try to talk things through with her. Treat her with respect and acknowledge her feelings. (See Geoffrey’s answer.)