A firmware hack is developed by a third party programmer. It is not authorized by the manufacturer.
A hack typically resides in a memory card. When a hack is uploaded to a digital camera, it modifies the software. It increases camera functionality, such as adding a RAW file format to a camera that does not have RAW.
If necessary, the original firmware can be restored.
Damage “theoretically” possible
As an example, some Canon camera users use the Canon Hack Development Kit (CHDK)* to add features to their Canon camera. While the CHDK website says there are no permanent changes to a camera, it does say in the FAQ that it is experimental and there is no warranty. They point out that it is unlikely to damage a camera but theoretically possible.
Elsewhere at the site, it states: “Although CHDK does not make any changes to the actual firmware on your camera, it may be possible to cause mechanical damage to your camera, but this is extremely unlikely due to the safeguards put in place by Canon.”
Does a firmware hack void the warranty?
Since a firmware hack is not authorized by a manufacturer, it may void a digital camera warranty. Some have reported sending a camera with a hack in for repair without a warranty problem. Either the firmware was reset to the original by tech support, or the repaired camera was returned with the hack still installed.
Should I add a firmware hack?
The decision is entirely up to you. If you do so, it is entirely at your own risk. Certainly think twice if your camera is still on warranty, which may also have an extended warranty if you paid for it with a credit card.
*If your camera stops working after trying to install CHDK: put fresh batteries in the camera, but no memory card. Double click the on/off button. The camera will turned on and then off. Press the button again and the camera should start normally. (Source)
Photo illustration by MIKI Yoshihito. Used under the Creative Commons License