The shovel is a simple tool designed to move earth. It is crucial to honing your dungeon-raiding skills, since shoveling is the only way to displace protected earth.
How to Obtain
Beginners automatically receive a shovel by looting a chest o plenty in one of the tutorial worlds. You also receive one as part of an early android quest. Non-beginners can either craft this item or trade for it in a market world.
How to Use
Shovels work by temporarily displacing earth and other earth-like blocks, namely, limestone, sandstone, snow, ice, clay, sand, compost, resin, and all ores that generate in earth-block form. When you shovel a block, it will change appearance, becoming a block of crumbs that you can then walk through. Shoveled blocks will revert back to their original states after a short time.
Since dungeons are under enemy protectors, and these protectors typically extend beyond the edges of dungeons to protect surrounding earth, you will often need a shovel to access the door of the building.
Shoveling does not bring any blocks into inventory, but in unprotected areas, you can mine up the crumbs before they turn back into their original forms. Note that mining the crumbs will always give you earth blocks, regardless of what the blocks were before you shoveled them.
Shovels can be used to mine nearly any unprotected block or item that a pick can mine, albeit much more slowly.
Shovels also deal melee damage to mobs, although in general if destroying enemies is your goal, there are probably way better tools and weapons to use.
To display flowers and pine trees without using compost or a flower pot, first place a block of compost, then place the flower, then shovel the compost, and while it's still in its crumbly state, quickly mine it with a pick. This will leave your flower intact and floating, and you can then put whatever you want underneath it.
The higher your mining skill level, and the better your shovel, the faster you'll be able to shovel.
On v3, as of this writing (February 2013), shoveling is by far the fastest way to move quickly through earth. It's significantly faster than v3 mining, and in fact is faster than the fastest v2 mining as well. A person using a shovel on v3 can move downward through earth nearly twice as fast as any player using v2.
Shovels have been in the game a long, long, long time.