Villages are variants of Forest, Snow and Desert biomes. Here Settler NPCs live on their own doing their tasks during the day and fighting Monsters at night. Players can come here to Trade with the villagers, especially if the desired NPC type is missing from their own settlements.
Villagers here are subject to friendly fire, so be careful when helping them fight monsters at night. There is, however, no penalty to destroying the villagers' homes, crops, or other tiles (other than leaving homeless villagers exposed to monsters at night), nor any penalty to looting the villagers' storage chests.
Villagers can be recruited for your Settlements, but only after certain conditions have been fulfilled, such as defeating Bosses.
Each village has a Ladder Down to the Caves of their respective biome. This can be useful if the player hasn't made any Ladder Downs while exploring and wishes to visit the caves.