Lava

Lava is a substance found at an approximatly 1900-2300ft depth. If a player comes into contact with lava, it will deal 100 damage per tick to the player. Monsters (except worms and every monster in The Underworld) also take damage from lava, but only 50.

Obsidian
Lava, with water, is the only way you can obtain obsidian, mixing (or touching) the two liquids will cause the creation of an obsidian block. This could be difficult due to the lack of water at -2100ft depths, Earthwelling is an effective way to harvest vast amounts of obsidian. Lava can also be transported via a bucket.

Properties
Lava functions the same as water, meaning you will lose air when submerged and you require Flippers to swim effectively in it.

Items that are thrown in the lava are destroyed. Therefore, use caution when you are accessing your inventory near lava. Note that the midpoint of an item has to collide with lava for it to be destroyed, so shallow lava may not destroy items. This is a useful property to keep in mind for creating monster traps, as even a shallow layer will hurt a monster, but won't destroy the loot.

Since 1.05 lava will remove Jungle Grass from mud blocks.

Trashcan
Because items in Terraria can never really be disposed of (just dropped on the floor), many players chose to have a small Lava pit in their house. By ditching unwanted items into the pit, players are guaranteed to never accidentally pick it back up. This effectively makes the Lava an item Trashcan.