If you keep a personal blog, you might put links on the side bar linking to other people's blogs. Those people whose blogs you are linking to can be your friends, your colleagues, your relatives ... etc. XFN, or XHTML Friends Network, is a standard way to indicate your relationship with the owner of the blog you are linking to.
The XFN code indicating the relationship between you and the owner of the blog you are linking to is written inside the XHTML anchor tag itself. Here are some examples.
So what's so good about this? If XFN spreads out in links inside blogs and other community web spaces, then a new generation of web applications will emerge able to read such relationships and understand them. This can result in a huge social networking connecting people on the web to one another.