The blue fluid found everywhere in Coldharbour is called Azure Plasma, and is unformed “chaotic creatia,” the stuff from which all Oblivion matter is formed. When a Daedra is “killed,” its morphotype, or vestige, gradually forms a new body by accretion of Azure Plasma.
The Village of the Lost is located on northeast region of Coldharbour. The nearest wayshrine is Everfull Flagon. A word of warning. The frequent one-way drops and one-way portals can quickly disorientate players to likely for lost in the dungeon’s title. I’ve included a map showing the portals.
Given the fast spawn rate of a public dungeon, this is an excellent place to farm alchemical oils for poisons. Since the dungeon is full of daedra, daedra hearts drop often. The village also hides 4 foul fishing holes.