Quicklime is an ingredient used in distillation and other recipes. It is crafted by placing Wood Ash into a crafting grid (in much the same way bonemeal is crafted from bones).
Quicklime is an irritant, it can be thrown by right-clicking with it equipped. Any creature hit by the Quicklime will be temporarily blinded and take a tiny bit of damage (if on full health). Slimes and Magma Cubes will take much more damage.