|Blister, by Novakreo, Wikimedia|
A blister is a pocket of fluid under the outer layer of skin called the epidermis. Most blisters we think of contain water, specifically the tissue fluid from the skin cells. Other blisters may contain blood.
How do they form? Blisters can form for a number of reasons, but they all stem from damage to the skin. Burns damage the epidermis and when they penetrate enough to damage the second layer, the dermis, they can cause excess fluid to build up between the epidermis and dermis due to the inflammation associated with that damage. Excess rubbing or friction can also cause irritation and inflammation, leading to the same thing. When the capillaries in the skin break, it can cause blood leakage under the skin and form a blood blister, as happens when the skin is pinched too hard.
Gross fact: large blisters are called blebs
Why do they hurt? Blister occasionally cause pain because of the pressure of the fluid build-up within the skin. When they break, they also expose the "raw" dermis underneath, where the nerve receptors are, causing pain and exposing the body to infection (which ca n cause additional pain and inflammation).
Peeling - the skin over the blister is the epidermis, which consists of dead or dying skin cells. So once the blister is broken, that skin isn't needed and peels off. Also, in the case of burns, the epidermis has been damaged, which leads to peeling to expose new, undamaged skin underneath.
|Peeling skin, by rjelves, Wikimedia|