A firmware dump is a binary file that contains the operating system and programs stored in the memory of digital camera.
When a digital camera is powered on, a very small program reads the programs from a very slow but permanent memory inside the camera to the main memory of the camera, which is just like the normal DDR or DDR2 memory in your computer.
When a Canon digital camera starts, it first checks for a special file called DISKBOOT.BIN on the SD card and if it exists it runs it (this file is usually created by Canon to update the software inside the camera).
The CHDK guys wrote a small software that tricks the camera into running that file but instead of updating the software inside the camera, it simply reads each byte from the camera's memory into a file on the SD card. So, you get an exact copy of the camera's memory which contains the operating system and the software that makes the camera's functions work.