Crowdsourcing is a term meaning work being done by a "crowd" of people, with the crowd generally being the public at large. And believe it or not, crowdsourcing has been around long before the term was invented. We've seen it used to provide evidence of Bigfoot or UFOs or the Loch Ness monster in contests that offer a reward for providing proof. And we've seen it in open source development projects where the 'crowd' are key to the development process.
With Web 2.0 providing a greater interaction among web users, the soaring popularity of the crowdsourcing model is not unexpected. Projects such as Wikipedia provide a great example of crowdsourcing on a large scale, but crowdsourcing doesn't have to be so grandiose. A t-shirt manufacturer opening up a suggestion box for t-shirt slogans is also utilizing the idea of crowdsourcing.
In essence, crowdsourcing is any sort of outsourcing that involves a large group of people actively participating in the project. Generally, this is the public, but a business might also utilize crowdsourcing techniques to develop an internal application.