Downtime is a period of time, usually about four hours, during which you can focus on an activity or otherwise rest without significant distractions. When you have more than four hours of downtime available to you, ask your gamemaster how many downtime activities you can perform over the time you have.
You can spend your downtime to create or modify items by making progress (on something big).
Recipes for crafting
If you make something more than once (or intend to make something more than once) brainstorm a recipe with your GM! A recipe is simply an agreed upon set of requirements that you need to create your item and a progress bar that shows when it'll be done.
As long as it makes sense, filling a progress bar more than once usually means producing multiple of whatever it is that you're trying to create. Because of this, permanent items should have big progress bars that are difficult to fill in one sitting, while single use items should have small progress bars.
Take this sleep poison, for instance:
Use a dose with an action to administer the poison in order to Hinder a target with a stack of Sleep; they fall into a deep slumber until all sleep dice are removed. Remove all sleep dice if they are awoken by someone else. If undisturbed, they may resist the poison every turn in an action scene, or every hour outside of an action scene.
Recipe: Sleep Poison
Requires your alchemists kit and a specific variety of mushrooms found in warm, damp caves.
Progress Bar: 20/20
Downtime activity appendix
Other than crafting, the rest of these things have been mentioned somewhere else, but they're collected here for your convenience.
Abandoning a skill or legacy
You can choose to regain some potential by abandoning a skill or legacy in addition to any other downtime activities.
Creating or leveling up a background
You can spend downtime reflecting on your past experiences to combine dice into backgrounds. Feel free to describe the scene as a flash back or a montage to the table to get everyone in on the fun.
Developing skills and legacies
Downtime can be spent to develop your skills and legacies, whether it's training to further your swordsmanship, carousing to develop your reputation as a drinking buddy to everyone in town, or doing coursework to advance your skill in dragonology.
You can spend downtime to prepare for an upcoming challenge by preparing.
Use a big special ability
When you pick out special abilities for your character, you can earn big special abilities that usually require you to spend some downtime preparing for use!