Nutty Butter resembles light tan nut-like pudding, similar to a peanut butter. It is created by mashing a bunch of nuts together and then combining it with lard.
Role in episode
After recently getting a lot of nuts in her treedome, Sandy decides to use some of them to make Nutty Butter. She has SpongeBob and Patrick try it and they both love the taste. However, Patrick soon has the other Bikini Bottomites try it and they all want Nutty Butter as well.
Sandy then decides to make even more Nutty Butter due to the high demand. Unfortunately, the tree starts to die out quicker due to the business. Once Sandy hears from the Shalmon that overusing the nuts from her tree is actually hurting it, Sandy decides to stop making Nutty Butter.
It is a play on peanut butter, which is also a type of nut.