There are really two different kinds of hacking going on here. The first kind is where people use applications of varying degrees of difficulty (it's actually getting pretty easy now...) to 'jailbreak' the iPhone, which allows foreign software to be installed on it. This is where people will install RSH so they can then copy binaries over to the iPhone which can be run from the main home screen. The goal of this form of hacking is to be able to do things like run the NES emulator and other third-party applications on the iPhone without having to do the whole 'Web 2.0'/AJAX thing.