The Lava Dragon is a mob added in "It smells like burning! (PART 2)" Update. It spawns in the Lava Biome and will drop the Lava Heart upon death, which is a powerful item used in crafting Lava Sword, Lava Spear and Lava Helmet.
In order to finish the Lava Orb quest, you must kill one of these dragons in 10 days.
Every weapon that is Reidite/Lava does 20% damage to the Lava Dragon. The Lava Dragon is very similar to the Dragon except keep in mind that the Lava Dragon can easily destroy walls (500 building damage) so certain methods will not work. Some methods to kill the lava dragon involve using a small stone as a barricade and killing the dragon by swinging through the rock. Or a better method is to lead it through to the Forest (Spiders will kill you if you are near them). This is really hard to achieve because you will need to walk across the Ocean (actually you will swim with Diving Gear or walk with Bridges). Repeat until you get to the forest then kill it the same way you would kill an Arctic Fox (NOT a Wolf due to its high speed).