This is the coliseum!
In case you were wondering what that might be, then allow me to break it down for you. The coliseum is a place to have your characters fight with others without running the risk of dying. Think of it as a training area that runs a virtual simulator. You're not actually here, there's no way of getting to this place, however, you're still here at the same time.

Just think of this place as another reality. Winning fights here is a good thing though! It can be just as bad for the loser though. The two people fighting agree on a single prize if they win. One person will get that prize while the other will lose that prize.

You can wager all sorts of things in this reality. You could wager X amount of chakra if you wanted to. However, the loser would lose that chakra. You must be the same rank as another fight them and it starts at Chuunin. Genin may not fight here.
If you're feeling lucky, you can risk the SOUL of another person to create a powerful custom weapon using their soul which was the reward.