A few details from the iPhone Dev Team blog:
We have been working hard on a few other things. The main one being the 3G unlock codenamed "yellowsn0w". This is now completed and is currently being packaged into a user-friendly application with the simplicity that you see in QuickPwn or BootNeuter.
- The target release date for the unlock is New Year's Eve 2008.
- This unlock method is available to iPhone 3Gs that have 2.11.07 baseband or earlier, we did warn you.
- You can tell what version baseband you have by going to Settings->General->About->Modem Firmware
- The unlock requires a jailbroken 3G iPhone. It'll be installable via Cydia and so it doesn't matter if you have a Mac or PC.
- Please refrain from updating your baseband, regardless of what version you're at.
- We'll have complete directions on New Year's Eve.
- We'll stream a live demo of the unlock before Christmas (see the update at the end of this post)
The software exists, as you can see from the video above, which was released last week, so I'm pretty confident we'll see the release as promised. From what I understand, the software is non-invasive and needs to be run every time the phone is booted, which will be executed during boot and invisible to the end user.
You do need an un-upgraded <2.11.07 version of the baseband, and for the near future you'll have to be careful not to upgrade it if you want to keep your phone unlockable. If you want to upgrade your phone but not kill the possibility of unlocking it, the team has some information on using PwnageTool to upgrade the iPhone firmware while keeping the baseband firmware intact. If you've already updated your baseband, consider yourself stuck with AT&Tuntil a new hack comes along.
Dev Team Blog (watch here for updates)
Original yellowsn0w Announcement
yellowsn0w Preview Demo