Lava is a substance only found underground in pools. It can be almost anywhere underground on a newly generated map.
Like water, lava spreads by duplicating itself to open horizontal and downwards squares. Lava is quite slow though and can be easily outrun. If quick enough a skilled player can block the flow of lava. If the lava wave is large enough though, a player will not be able to build fast enough. Also like water, Lava slows down the player moving through it but it does so to a greater extent. Lava is also more opaque than water and is harder to see through.