PeerBlock is a type of program known as an "IP Blocker" (Wikipedia article). It monitors each connection your computer tries to make with another one - and each connection other computers try to make with you - and then compares the other computer's IP address against a list of "known bad" IP addresses to see whether it should let this connection go through or not. (See our How the Internet Works page for a quick introduction to what IP addresses are, if you need a little background.)
Your protection level is based on the lists that you choose to use. In addition to the few "default lists" PeerBlock lets you specify via checkboxes, it can also use any of a number of different lists. Check out iblocklist.com for a huge assortment of additional lists that may interest you; some are additional lists of Anti-P2P organizations, some are lists of known-hacked (or hacker!) computers . . . or you can choose to block entire countries if you'd like.
PeerBlock is free, open-source software. This means that anyone is welcome to look at the source-code for the program, change it, fix it, build it themselves, make sure it's not doing anything nefarious in there, etc. All for free! However we do have costs associated with development of PeerBlock, which is why we solicit donations. If you find PeerBlock to be of value to you, please click the PayPal Donate button on the side of the page to contribute to the cause!
Note that PeerBlock has no idea about any websites you may be visiting - it never even sees that information. Because of this, it may end up preventing you from visiting certain websites. Not necessarily because of what's on those pages, simply because of the IP address of the machine hosting that site.
If this is a problem for you, you can "Allow HTTP". HTTP means website type traffic, or as far as PeerBlock is concerned any connections going to port 80 or 443. Note that PeerBlock doesn't check that these connections are actually web traffic, so if your torrent client permits connections to port 80 or 443 this is a small security hole, in that PeerBlock will not be filtering any of those connections. It also won't be able to prevent you from browsing any malicious websites, be they hacked, malware-providing, virus-installing, tracking, or advertising sites.