What is iPhone Baseband?
iPhone baseband is the basically the system behind the modem of an iPhone. The phone has a system for the computer and a separate system (analogy: operating system) commanding the modem part.
A baseband upgrade is essentially a modem specification upgrade. Phone hackers keep updated on different and the latest versions of iPhone baseband, because hacking the baseband first is necessary before somebody can be able to jailbreak an iPhone(or free up an iPhone from manufacturer restrictions).
In order for a user to be able to use his iPhone using other carriers for voice calls, modifications on the baseband is necessary so that a phone can be unlocked. For instance if an iPhone is locked with AT&T as a service provider, in order for a user to be able to use it for calls, SMS and data transfers with Sprint, the iPhone would first have to be unlocked, and in order for it to be unlocked, the baseband would need to be accessed.