The PVP Colosseum was implemented on May 15, 2013 and is scheduled to run twice a day, at 1PM and 6PM Pacific time. Announcement on official RO2 website.
All participants receive special Colosseum buffs, raising their HP, SP, and other stats in order to even out the playing field. In each round, there will be random monsters to attack, as well as the other players, so one can attempt to earn points for defeating the monsters if the other players are too powerful. At the end of each round, kill counts are tallied and points awarded to each player. The players with the lowest point scores will be eliminated, while those with higher scores advance to the next round. Those who survive at least one round, but were eliminated in a later round, will receive consolation prizes in the mail afterwards. PVP points earned from Colosseum participation can be checked on the character status screen (default hotkey C) represented by a red droplet icon. These points may be redeemed at the PVP vendors in the Knightage builing in Prontera.
[Edit: The reason all Colosseum instances appear to be full of only level 50 characters is due to the special buffs scaling all entrants to have level 50 stats. Players can only see the true level of their own character; all others appear to be level 50 regardless of true level outside the Colosseum. Also there have been reports of first job characters below level 25 being able to enter the Colosseum.]