Obsidian farming is very useful, especially earlier in the game, when massive caverns have not been found yet. Obsidian farming is accomplished by pouring lava in a trench (must be still) and then pour water so that it flows over top, creating obsidian. This is the favored way to obtain obsidian, becuase mining, and even just finding, obsidian is very risky and dangerous. Obsidian is ALWAYS next to lava, so you must either block off the lava or swim aginst the current of the water. With farming, all you do is place the lava and pour the water yourself, making it less dangerous.
Building
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Caption 1
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An advanced obsidian farm.
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From the inside.
A good way to start is to find an open area. If you are building one underground, just dig/mine enough area for at least a 1x10 trench. There are 2 types of farms:
"Basic Farm"
This is basically just a trench dug into the ground with walls on either side; nothing special. It gets the job done without the all the luxuries. It is simply made by digging (at least) a 1x7 trench in the ground and bulding short walls on either side.