It’s a 2D sprite based fighting game engine that lets you import characters and stages from literally any fighter ever made (even some non-2D ones too!).
Sadly the engine is closed source and is kind of abandonware but it’s kept alive by fans over the years.
There’s so much you can do with it. Sure a lot of it is jank, but thanks to fans it’s a very reliable way to play sprite based fighting games on PC outside of emulation.
MUGEN is fun, but I wouldn’t take it seriously at all, even if there are some pretty good games built on top of it like a remake of Street Fighter 1. If you want to have Optimus Prime fight Scorpion, there’s no better way to do it.
Yeah base mugen is pretty bad for serious fighting, but like you said there’s some pretty solid looking fan games built on it.