Humanity has two forms, typically referred to as "hard" and "soft" humanity. "Hard" humanity refers to the humanity items, including Humanity itself, Twin Humanities and Firekeeper Souls. They are never lost when you die and act as consumable items. Soft humanity refers to the number on the counter next to your HP and Stamina bars. Soft humanity always goes to your bloodstain when you die. You get soft humanity by using hard humanities, killing other players in invasions, defeating bosses when summoned as a phantom, killing enemies in areas where you haven't defeated the boss yet, or by stealing it from other players with the Dark Hand.

Soft Humanity has two important uses:

1. Unhollowing yourself so you can participate in PvP and Co-op.
   
2. Kindling bonfires to give yourself extra Estus flasks.

Both of these functions can be used at the bonfire menu at the cost of one soft humanity for each use.

Soft Humanity also has some auxiliary effects. It increases your item discovery stat and curse resist as well as your damage scaling with Chaos-infused (and a few unique) weapons. They also serve as donation items for two of the covenants.

Hope that covers everything!