I have a Huawei U8160 (also known as Vodafone 858 Smart) which is running CyanogenMod7.2
There are settings for VPN which are empty. I was wondering if the VPN server setting should be set to a real server?
Or should I just not touch it?
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A VPN is a virtual private network.
Your device connects to a VPN server through a public connection and tunnels a second virtual and private (to you) connection through the VPN server to see all devices that are protected behind the VPN server (such as a company's whole network infrastructure for example).
This feature is mostly used for road warriors that want to connect to a company's internal network resources like email / internal web sites and so on. Other uses are: Securely connect two different company sites virtually, working from a home office...
It's generally not for normal users (Cyanogenmod includes it for some power users that also connect to a VPN).
See Wikipedia for more.
Regarding your question: Leave the setting empty, you just don't need it most probably.