To put it in simple terms--this tool links words appearing on your site or blog to words tagged with the same word on your delicious account.
This is to show related content for each word on your site. Similar tools are available for google and customised search engines as well. You can take a look at a example page.
More functionality can be added to this gadget such as NHTML. By this multiple words can be linked to numerous sites. Don't add any code containing html or script. Use only plaintext or else this gadget will get confused.