where it starts and how to tell
The Underground is the first layer beneath the surface. It begins at zero feet on a Depth Meter and runs down to the top of the Cavern layer. You can identify it without a readout by the background alone. Surface terrain has naturally placed dirt walls sitting behind it; the Underground has none, just a flat brown backdrop with nothing behind the blocks. A hammer will not touch that backdrop because it is not a wall, and for the same reason you cannot place blocks in midair down here until you put up walls of your own.
what generates in it
Dirt and stone make up most of it, broken by small pockets of Clay, Silt, and the lower tier gems and ores. Gem trees grow at this depth and give back stone, gemcorns and sometimes the gem itself when chopped. The dye plants live here too, Green Mushrooms, Orange Bloodroot and Teal Mushrooms, all of which the Dye Trader will take off you. Blinkroot grows on the dirt here, which matters more than it sounds, since it is one of the few herbs you can genuinely run short of.
the enemies
The step up from the surface is real but modest. Red and yellow slimes take over from the blue ones, Pinky shows up rarely, Blue Jellyfish sit in any pool of water, and Giant Worms burrow through the dirt around you. Hardmode fills the same slots with harder occupants: Diggers for the worms, green jellyfish for the blue ones, Toxic Sludge for the ordinary slimes.
cabins and the first traps
This is the shallowest depth where traps generate, so this is where you start watching for wire and where a Dangersense Potion begins to pay for itself. Underground Cabins appear here too, less often than in the Caverns but often enough to be worth opening every one you pass, because their loot pool is the good one. Cloud in a Bottle, Hermes Boots and the Magic Mirror all come out of them, and any of the three changes how the early game plays.
do not linger here
Almost nothing is exclusive to this layer. The true underground biomes do not start in it. The Ice biome, the Underground Jungle, Underground Corruption and the rest all begin lower, in the Cavern. The one exception is the Underground Desert, which starts up in surface terrain and runs down through this layer into part of the Cavern. Treat the Underground as a stairwell: dig through it, take the ore you happen to pass, and spend your torches and your time on the Caverns instead, where the chests, the enemies and the unique drops actually are.
two small things
Mice and snails wander around at this depth, and a fairy occasionally spawns and flies off toward something worth having nearby, usually a chest, a Life Crystal or a vein of ore. Follow it. Fishing down here needs a pure Underground biome; any corruption, crimson or hallow tiles within range and you will pull those catches instead of the ones exclusive to this layer.

