Pretty sure it's a device that will intercept bluray disc drive operations from the PS3 to allow you run the games off a hdd instead. Seems it will emulate the bd drive and essentially "trick" the ps3 into thinking it's a legit disc being played. That's what I've gathered from it anyways.
Seems this thing could certainly affect the integrity of the PSN. Likely be a slew of online cheating options since the game files will be open to manipulation. Curious how seriously Sony may take this thing, if it indeed comes to be someday.
Guessing there will be protection in place to stop Sony from it, but, likely they will be able to detect it this way too. Likely too early to tell though. Nobody really knows much about this thing from what I've read. I would imagine Sony has access to flash the drives under normal conditions in the PS3 as does MS in the 360. Curious to see what comes of this myself though.