That Oz is entirely surrounded by desert is established in the very first Oz book, in which the Munchkins tell Dorothy that deserts border the land to the east, west, and south; and the Good Witch of the North adds that it's the same in the north, and in fact they're all the same big desert. The impression given is simply that the desert is too large, hot, and dry to cross, but later books add more details. The fact that Ozma and her party need a magic carpet to cross to Ev in Ozma of Oz suggests that the sands themselves are dangerous, and a sign in Road reveals that they will turn any living flesh to dust. We never actually see this happening in the canonical books, raising the possibility that this is merely a rumor, but if so it's an awfully widely believed one that even Glinda apparently buys into. So I think it's likely that the stories of the sands' harmful effects are indeed true, and some apocryphal books confirm this. In Gardener's Boy, Candy Longtaw constructs sand shoes in order to cross the desert, and the sand turns one of her toes to dust. In Emerald Ring, Arthur Spyeking falls victim to the desert sands, but is restored by the Water of Ligrinia, an antidote developed by Glinda. Not only does it restore him to life, but it makes him immune to the desert for an entire year, which comes in handy in temporarily destroying the witch Kiex.
Getting back to the canon, I believe Scarecrow is the first to refer the desert letting off "[d]isagreeable fumes and gases," and several other books repeat this detail. Some books, including Silver Princess and Lucky Bucky, mention the desert churning and breaking almost like a sea, while others suggest that it's eerily calm. Perhaps it all depends on the part of the desert, or some other factor. The map on the Tik-Tok endpapers gives the place four names--Shifting Sands in the east, Impassable Desert in the north, Deadly Desert in the west, and Great Sandy Waste in the south--which could reflect the nature of different parts. These names aren't always used consistently, however, and it's typical for the entire thing to be called the Deadly Desert. There's a popular rumor that L. Frank Baum's last words were "now we can cross the Shifting Sands," but it's most likely untrue.
Is the desert inhabited? It would seem unlikely, seeing as how it turns living flesh to dust, but I'm sure we know by now that creatures in and around Oz are often made of materials other than flesh. I think the first living creatures to appear there are the Heelers, who seem to have been added to the Wonder City manuscript by the book's editor. Their bodies are like giant sponges, they walk on their heels, and they live on votes. Since the Heelers are immune to magic, that might pertain to the desert itself, and explain how they can live there. The Flame Folk I mentioned last week live in the desert, and Jack Snow claims that salamanders and scorpions can also survive there. In Forbidden Fountain, Toby Bridlecull says that a band of blue-eyed gypsies dwells in the Impassable Desert, at an oasis known as the Fountains of Romany. If this is indeed true, perhaps they have some magic to protect them from the sands' ill effects. March Laumer places several human habitations within the desert, but I never really bought this. Still other apocryphal sources add robots (not alive, but self-aware nonetheless) and dust devils as residents of the sandy waste. I would imagine that even these beings tend to stick to specific isolated regions of the desert, however.