The Touch 4th Gen is the only iPod Touch to have cameras in it. There is one that faces toward the holder and then one at the back peering through the backplate. These are used to take single snap shots (think family memories or sexting), to use for FB status updates or video conferencing using FaceTime or Skype.
It's possible something can go wrong with either camera, usually it's part of getting the front smashed. However there are people that damage their Touch while trying to repair it themselves.
The chart below shows what camera replacement costs.
