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Dirt is an acting wall tile to everything except Chip and Melinda (if she is wearing hiking boots), who turn it into floor when they step on it. Tiles with the same property are referred to as acting dirt.
Dirt can be added directly to a level, or created by pushing a block into water. There is no set rule as to when or if Chip must remove dirt he creates. Leaving created dirt as is may assist with monster collisions.
Typically, when dirt is added to a level, it is used as either a (temporary) barrier between monsters and Chip (Digdirt), a guide through invisible wall mazes (Vanishing Act), or as an obstacle to moving blocks (Metastable to Chaos).