What is this VPN setting good for? I have a Huawei U8160 (also known as Vodafone 858 Smart) which is running CyanogenMod7.2

There are settings for VPN which are empty. I was wondering if the VPN server setting should be set to a real server?

Or should I just not touch it?
A VPN is a virtual private network.

Your device connects to a VPN server through a public connection and tunnels a second virtual and private (to you) connection through the VPN server to see all devices that are protected behind the VPN server (such as a company's whole network infrastructure for example).

This feature is mostly used for road warriors that want to connect to a company's internal network resources like email / internal web sites and so on. Other uses are: Securely connect two different company sites virtually, working from a home office...

It's generally not for normal users (Cyanogenmod includes it for some power users that also connect to a VPN).

See Wikipedia for more.

Regarding your question: Leave the setting empty, you just don't need it most probably.