That is localhost but for IPv6 i.e. the equivalent of IPv4’s 127.0.0.1
There is nothing wrong with pointing your DNS at localhost provided that
a) if you are going to point it at localhost IPv6 then better make sure that IPv6 is working
b) more importantly, you must of course be running a DNS server locally
That’s all by way of an aside to answer that question.
You haven’t provided much info to go on.
What hardware?
WiFi? Ethernet? Both?
Is the interface / Are the interfaces configured to use DHCP? static IP address? something else? If not static IP address, what IP address are you getting?
Have you enabled IPv4? IPv6? Both?
Are the interfaces configured to get DNS via DHCP? static configuration? something else?
I don’t know whether that’s really the right file. A thousand years ago that was the right file and it would be statically configured by the system administrator. These days I think that file is only an output - and if it doesn’t contain the right thing then that is only a symptom of a problem elsewhere (and likewise editing that file is not fixing the underlying problem, so it will get overwritten).
Most people would consider that to be privacy fail. Were you previously using that as your DNS server? Or just trying it now for testing? Whose DNS server are you intending to use? previously using?