Obsidian is a unique crafting material created when Water and Lava collide, at which point it forms in purple Stone-like Blocks that can be mined. Obsidian appears as an Ore and is gathered similarly, but has no bar form of its own; though it is required in order to craft the essential Hellstone Bars. Mining Obsidian requires a Nightmare Pickaxe, Deathbringer Pickaxe, Molten Pickaxe, any Drill, or Bombs/Dynamite.
- Obsidian is not destroyed by Lava, despite not being of Blue Rarity.
- Probably the easiest way to obtain a significant amount of Obsidian with minimal amounts of preparation is to find a body of water deep underground, just above the level at which lava pools begin to appear. Then dig a channel for the water to pour through until it reaches lava. If the lake is of a sufficient size, you can quite easily obtain enough Obsidian to craft hundreds of Hellstone Bars and Obsidian Skin Potions.
- Obsidian is fairly rare naturally and will usually require player intervention to spawn.
Obsidian can be harvested by creating a generator. A generator is an exploit that allows the infinite creation of lava and water, to create obsidian. Liquids in Terraria can be duplicated in this way because of a game mechanism in which a full bucket will always produce one full block of liquid, while less than a block of liquid is required to fill the bucket.
This video contains a detailed explanation on how to set up the machine. You could also use three or four blocks on the lava duplicator, instead of two, in order to speed up lava duplication. This allows you to click faster, like the water duplicator, since the lava will spread out faster instead of taking time to actually fall off the block.
With the introduction of mechanisms such as Pumps, wire and timers in 1.1, it is now possible to construct an automatic obsidian generator, which does not require using buckets to repeatedly refill the lava or water vats.
A sample set-up of an automatic obsidian generator can be found here: 
Video detailing the construction of a fully automated Obsidian Generator using vats and pumps:
- 1.2.4: No longer used to craft the Abeemination.
- 1.2: Stack limit was increased from 250 to 999.
- 1.0.2: Hellstone and Obsidian now require at least a Demonite pick to gather.
- Pre-Release: Introduced.