Mushroom

The Mushroom is a plant that spawns randomly in above-ground Grass. It can be eaten for 15 health restoration, or used at an Alchemy Station along with 2 Gel and 2 Bottles to craft Lesser Healing Potion, which restores 50 health.

Other types
A "Mushroom" generally refers to an ordinary orange/red-colored Mushroom that grows in ordinary green grass. There are two other mushroom types:

Farming
Strips of dirt can be placed and connected to grass, or grass can be spawned using Grass Seeds purchased from the Dryad. Grass can also be placed using the Staff of Regrowth.

Only 1 tile of vertical clearance is required, so dirt strips can be placed close together in groups of 3 (more than that and you may not be able to harvest them), one tile apart vertically. Mushrooms will not grow if there is any type of wall behind them, so make sure the sky is visible behind the dirt strips.

Mushrooms do not require water. They can spawn while on-screen, unlike Trees.