Paintown is essentially two different games in a single package. It contains the framework for a sidescrolling level-based beat 'em up adventure game, but it also comes with a built-in edition of M.U.G.E.N., a highly customizable one-on-one arcade fighting game with an active community of content contributors.
The game is playable with built-in content, but just barely. Despite a pretty good variety of characters in the regular beat 'em up mode, from Goku to Michael Jackson, their fighting repertoire is limited to two-button bashing (though simple combos are available through experimentation). The included "Wolfburg" mod does a poor job illustrating the capabilities of mods, as the difference from the unmodded version is barely discernible. As for M.U.G.E.N. mode, it only comes with a single character, the remarkably unremarkable Kung Fu Man, and I was unable to determine an appropriate method for installing new characters.
My conclusion has to be that while Paintown appears to be an adequate framework for 2D fighting games, it is currently sorely lacking in the content required to make a play experience enjoyable.