Urine is a rare liquid Material. Originally urine could be found by left clicking while transformed into a deer, but it can now be found in either a Urine Jar (very rare environmental spawn) or Urine Flask (very rare treasure chest reward). The unique jar item can be picked up and used like typical flasks and it has its own unique sprite. The Urine Jar spawn can be found in the Mines, and the Urine Flask can be found in any treasure chest.
Contact with urine applies Jarated, an effect that provides combustion resistance while increasing the risk of receiving critical hits. Drinking urine causes food poisoning. It also has the unique ability to slowly melt powdered/fallen snow, though packed snow and ice remain unaffected.
When combined with lava it creates a solid material called Fools Gold.
From an AMA posted on reddit the developers hinted that back when urine came from deer there was all sorts of weird things resulting from it, including this tidbit:
"My favorite bug was the deers drowning in their own piss :)
So back in the day we put some animals and had them roam around in the world. And also they had to urinate from time to time. Because the game is 2D, the urine would fall into these ditches. And what ended up happening is that deers would also hang around in the ditches urinating themselves. Eventually there would be so much urine that deers would drown in it. And the landscape was littered with these ditches full of urine and dead deers. Good times."
can be found early on in seed 48490521
//Petri Purho (AKA Gummikana)
The Urine Jar is a reference to the Jarate from Team Fortress 2. The Jarated effect works similarly to the referenced effect from Team Fortress 2.