The terminal remains loaded in memory, hidden. You press a key, and it slides down from the top of the screen, hence the "drop down" term. The remains-loaded part is what typically makes it smoother and faster than just having a key binding to launch your more typical terminal of choice. Between those two features it makes it fairly convenient.

On the N900, the closest thing I use is proximityd (or whatever it's called - it lets you configure both the proximity sensor and the camera key to perform different actions) to map launching an X-Term with the half-press of the camera key. It's pretty damn convenient minus the occasional accidental trigger (which sometimes gets repeated so you flood the phone with 2-4...in rare instances way more - X-Term windows). I've never used drop terminals but on the N900 I love that as a setup.