Obsidian

Obsidian is a block created whenever water touches lava. When this occurs, the lava or water (whichever is below the other material) becomes obsidian. It can only be mined with a Nightmare pickaxe or better.

Obsidian can be crafted into an Obsidian Skull, which is an equippable accessory that provides protection from hot blocks, like Hellstone and Meteorite blocks, which would normally burn you. Obsidian is also a component required for crafting Hellstone Bars. Obsidian is hard to find naturally due to water rarely spawning on lava, but the use of a bucket makes gathering obsidian less difficult. If you don't have a Nightmare pickaxe you can also use dynamite to blow up the ore and gather it, be careful with it though.

Creating Obsidian below the ground:
 * 1) Find an underground body of water.
 * 2) Dig a tunnel at the bottom of this water, so that the water drains lower and lower.
 * 3) Whenever you see a cave or another body of water through the walls, connect your current tunnel to them so that the water drains faster and there is more water.
 * 4) If you are running out of air, dig a small side passageway with a "bubble" above the water level so you can breathe from time to time.
 * 5) Continue your ever expanding water tunnel until you find lava. When you find lava, allow the water to come in contact with the lava to produce obsidian.
 * 6) Using this method, you should have a near limitless supply of water above you, and can therefore produce as much obsidian as lava that you can find.

Trivia

 * Obsidian cannot be destroyed with Bombs, making it useful for bomb pit traps during invasions.
 * Prior to 1.0.2 Obsidian could be mined using any pickaxe. In patch 1.0.2 and later versions, Obsidian can only be mined with a Nightmare pickaxe or better.