Mud is a block of wet dirt found in riverbeds under water, at the floor of lakes, under ice lakes, and also in patches embedded in rocks in the Stalactite layer underground.
Some creatures like Pebbles, Rocksters, Night Rocksters or Rockzillas will either drop Mud in their Loot Bags when being killed or will sometimes provide you with Mud additional to their usual harvest as pets.
Since R34 in September 2016 you can harvest blocks of Mud without having to equip any Power Cells.
As of March 2017, Mud cannot be created nor crafted.
When walking on Mud (it can be placed directly), the player-character will be slowed down significantly and also even pushed back a little. Mud can be tilled (just like green Grass and Dirt) with a Plow so you can grow Crops on it. It will revert to Dirt after a while though if you don't plant any Seeds on it, and when green Grass is near, it will then turn into Grass.On top of blocks of Mud sometimes Corals will grow, especially if a body of Water or any other Liquid is close. So this is also a way to "grow" (or "farm") Corals.