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Touchstone starts off as Duke Frederick's court fool and ends up being Rosalind and Celia's partner-in-crime for their runaway adventure. As a "licensed fool," he literally has a license to say whatever he wants.
Touchstone is brilliant—he's insightful about human nature and has a quick wit. He's most notable for his incredible ability with words; he loves to twist any argument and nitpick over any little thing. He is also in the habit of driving his listeners to frustration if they're not as sharp as he is, and goodness knows the man can belabor a point.
So Touchstone provides a few good laughs. What he says is believable and usually has something interesting beneath the surface. Touchstone's name is an explicit reference to the type of rock called a "touchstone." A touchstone is a stone that's used to identify precious metals by testing their purity—for instance, scraping gold against the touchstone will leave a little trail of dust that one could judge as evidence of how pure or mixed (and thus how valuable) the gold was.
Like a touchstone, our beloved fool has the ability to reveal the purity and value (or lack thereof) in human beings by scratching at their surface with his words and revealing what's underneath. Touchstone, like the Fool in King Lear, is another one of Shakespeare's characters that can say wise things in an amusing way without sounding like a drone. Touchstone himself comments that he loves a good fool, and more than once talks about the wisdom of foolishness.
Perhaps the strangest thing about Touchstone is that with all his cynicism and insight into human action, he's actually a rather jolly character. Mostly, Touchstone is a wise guy who he doesn't think he is above anybody or beyond the folly that just comes with being human. Touchstone laughs at himself as easily as he laughs at others. He's raunchy, funny, and observant, and never fails to provide a witty perspective on the serendipity and capricious madness that characterize the entire play.