Terraria – What are the red lines for

From the 1.0.5 change log

Mud and ash now have a chance to fall like sand when struck.

Playing with it currently I seem to get a mud slide about 1 in 4 mud blocks dug, as the chance is presumably calculated for all neighbouring blocks the actual chance per block is likely lower

As for mining, make a ceiling out of stone or dirt and dig under it, digging down should be easy, be careful when digging sideways to dig at your farthest reach.

for mud you can also plant jungle/mushrooms in it which seems to prevent the falling chance, this would be quite situational as normally if you are tunnelling through it you will be removing the grass/fungi too

EDIT

from the 1.0.6 changelog

Ash and Mud no longer fall due to gravity.

so ash/mud physics is now of interest only as an historic note (unless it comes back again)

The Demon Scythe is a rare spellbook that was released with the Terraria 1.0.5 patch. It has a roughly 2% chance of dropping from any slain demons.

So your find was quite rare! If you've not yet exited the game world, I'd suggest going back posthaste, as that's a great spell, and very worth a couple of deaths trying to get it!