The theme is the general style the level generator uses to create your level. Added in 0.31, it dramatically affects Survival mode in the availability of resources and tactical locations for defense.
Normal
The default level theme. Overground, one will find sporadic trees and generally favorable space. The weather is constantly partly cloudy, and the lengths of night and day are equal. The boundary liquid is water. Underground, ores of all types can be found and lava is generally near the bedrock.
Hell
The second level theme introduced with the theme feature. Hell features significantly less lighting during the day, where mobs of all types will spawn at any time. The boundary liquid is lava, and grass does not grow on soil blocks.
Paradise
The third level theme is more relaxed than the other themes. It features larger beaches and plentiful flora compared to the Normal theme, and the sun never sets. Hostile mobs will never spawn, but cavern systems are still generated.
Woods
The fourth level theme is a middle-ground of challenge between Normal and Hell, providing constant overcast during the day that reduces light, and planting trees over all available land space. Additionally, mushrooms are spotty throughout the overground areas.