A town that developed on the outskirts of the Demon Ruins/Lost Izalith whose inhabitants became infected by the Blight Pus. It is likely that many of the people here became servants of Quelaag and her fair sister.
Blighttown was likely always a less than desirable place to live or work. It appears to be a sort of mining community, complete with rickety ladders and platforms. It connects to the Depths where, according to the Sewer Chamber Key, people were banished once they turned Undead:
In any community, a few bad apples are sure to exhibit insatiable greed. If they were turned Undead, and banished to the Depths, would they reconsider their ways?
The mining aspect is further supported by the platforms that hug stone walls, tunnels dug into the side of the cliff. Some Infested Barbarians drop pickaxes, and the slugs drop Titanite.
There is a possibility that Blighttown is where Titanite was discovered and/or mined, as mentioned in the Titantie Chunk description:
With the discovery of chunks in Lordran, the race to locate the Legendary Slabs has begun. But could they be mere myth?
It is also worth noting that the aquaeducts from The Depths drain their water into Blighttown. According to the Blighttown Key, even those banished to The Dephts were wary about Blighttown:
As its name suggests, Blighttown is a place of great pestilence. Even the polluted inhabitants of the Depths are aware of its dangers, and built this mighty door in hopes that they could remain safely separated.
Sitting just outside the entrance to Blighttown is Domhnall of Zena. Once having reached the bottom, the Undead is invaded by Maneater Mildred. Somewhere in this swampy area Quelaana of Izalith wanders. At the base of Blighttown, the Undead faces the arachnoid Chaos Witch Quelaag and thereafter awaits the second Bell of Awakening. Once both bells are rung, the gate to Sen's Fortress opens.