The crown is a unique armor piece and a drop from a boss called The Skeleton King. If you defeat him, he will drop it.
The Crown of Nightmares has lots of good effects, but make sure never to sleep with it on your head without reason, because if you do, you will have Nightmares (Made by Bilbo Baggins). Now for the good effects. With the crown on at night time you will have night vision, and undead mobs will not attack you. They will attack you at day time, though. The crown also gives half an armor bar. At day, you only get half an armor bar, nothing else.
The crown does have durability, but I’ll leave the amount to the developers, and the ways to take durability are: Taking damage w/ it on, and wearing the crown during night will take three durability points every minute. You can repair it by sleeping with it on your head, like you’re feeding it nightmares.
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