Defense

Defense is the number that determines how much damage can be absorbed per hit. Damage the player takes is reduced by their defense divided by two. Defense values are rounded up.

Defense can be increased by equipping armor and or accessories, as well as (temporarily) Ironskin Potion and Bowl of Soup

Mechanics
Defense (or Defense Rating) gives an arithmetic reduction in damage: i.e. reduces damage by a fixed amount per hit (as opposed to a geometric damage reduction, which reduces damage percentage based). Because of this, ironically, high Defense is particularly important against low damage attacks, which can be reduced almost completely, but not as important against high damage attacks, where the reduction won't be as effective.

Formula
The formula is: Damage Reduction = ROUND_UP(Defense/2) For example, with 10 Defense, a 20 Damage attack is reduced by 5, to 15 Damage.

Monsters
Monsters have same Defense mechanics as players. Monsters with high defense will take virtually no damage from low damage weapons (i.e. Fire Imps take 5 damage from the Minishark with Musket Balls). Accordingly when fighting high defense monsters, high damage weapons are preferable.

Armor and Accessory Defense
See Defense for full list. Here is a list of armors, accessories, and their respective defense bonuses, including any applicable set bonuses. As of the 1.1 update the highest possible defense bonus obtainable is 85 Hallowed armor gives 50 defense, you can then equip an Obsidian Shield (+2), Obsidian Skull (+1), Cobalt Shield (+1), Moon Charm (+1 during a full moon) Shackle (+1) to provide a defense of 56. If all these accessories have the warding attribute, that provides an additional 20 defense, totaling 76 defense. Ironskin and bowl of soup then give an additional 9 giving 85 total defense.