The headset was most likely set too lose and repeated impacts eventually dimpled the lower cup. It's a common headset issue. I would be surprised if you were able to get a satisfactory adjustment out of the headset with it in that condition, but if you can there's nothing dangerous about using the bike in that condition. Eventually, the headset will start ratcheting or will either be too loose or too tight not matter what you do due to the wear. At that point, you'll want to replace it. The contact surfaces won't fix themselves, though you'd make millions if you could figure out how to make that happen (cheaply).