You can drag a ZIP or RAR file (or even multiple ZIP/RAR files) onto the DropZip icon and they will be magically unzipped into a folder with the same name as each ZIP or RAR file, for example. Drag your Zip file hello.zip from My Documents onto the icon. Look in My Documents, there will be a new folder called hello.
It also has another feature if you drop a folder (it must be one folder on its own) then that folder will be converted to a ZIP file (note the folder won't be deleted). This is not designed to be a replacement for your normal ZIP or RAR programs; instead, it is designed for convenience when you need to quickly unzip or unrar something.