web 2.0 is social networking & social media. Things like facebook, twitter, youtube, linkedin, flickr etc. etc. Social media optimisation is the process of designing campaigns to gather traffic from these sites .... it isn't necessarily helpful for traditional SEO and rankings but it will bring targeted traffic.
Just allow your readers and potential customers a chance to interact. Allow comments on your blog, especially using programs like Disqus and Comment Luv. On your site or FB page, are you adding survey's or other places for feed back on your products?
Select at least 5 web 2.0 sites you'd like to work with. See if they'll be compatible for the content you'll be providing. Some are strictly news sites, others are strictly whimsical. Take detailed notes or videos while you setup the initial content. I haven't seen two sites even remotely close to working the same way. By the time you get to the third site you'll understand.
its not possible to say how web 2.0 works in few lines. you can utilize the power of web 2.0 and social media many ways. some will do youtube video marketing, some will do facebook/myspace/linkedin marketing, some will bookmark a site on social bookmarking sites, some will setup web 2.0 pages on high ranking social media/web 2.0 sites - so many ways to explore. here's an article you can read which covers link building using web 2.0 sites: http://www.seofocused.com/blog/link-building-with-social-media-and-web-20-sites
My only advice is to build a network of them. Especially if you're using free versions (yes even wordpress blogs hosted on their server) you need to be protected if anything ever happens. Squidoo took a huge hit about a year ago which hurt a lot of IMers a ton.
Web 2.0 is great for backlinking purposes to your money site. Look into SENuke if you want to know more about this.
Web 2.0 properties, we can use them in Link wheel strategy which is very power full strategy in SEO, which help us in ranking instantly for our targeted keywords.