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The obsidian skull is created at a furnace by crafting 20 obsidian blocks. The obsidian skull provides a 2 defence bonus, and prevents you from taking damage on fire blocks.
This means that mining difficult ores such as meteorite and hellstone will become much easier as it can no longer damage you when you stand on it, assuming you have it equipped in the accessories slot.
Be sure to take the time to give this video a thumb sup, it helps a lot, thanks! :D