Loki is a killer idea and a precursor to the rise of location-based contextual advertising. So what does it do? In short, Loki is a Firefox/IE plugin that detects your current location based on the Wifi access point you are using - it then allows you to conduct searches in your local area. And this isn't just a search for businesses and services - you can find news about local sports teams, events, local bloggers, gas prices, traffic reports, weather forecasts and more. All in all, an impressive tool.
What this really hints at - and more so than Plazes - is the new brand of location-based advertising that will presumably be part of Google's free wifi efforts. The least invasive way to deliver these ads is through an Adwords-style system, although other systems (personalized alerts of local deals, for instance) are a possibility. I'm sure some people will find this advertising invasive, but no one can deny that it's on the way.
PS. Living outside of a metropolitan area, Loki isn't doing much for me. Let me know if you have more luck.
Update: On a related topic, Shimon Sandler has a post today about GeoAds for Google Local.