sid is the name of the unstable development branch of Debian GNU/Linux, where most of the software packages are initially uploaded. It will never be released directly, because packages which are to be released first must be included in the testing branch in order to be released in the stable distribution. sid contains packages for both released and unreleased architectures. As in the other branches stable and testing, unstable consists of packages categorized into separate main, contrib, and non-free sections.
As with other Debian codenames, the name "sid" comes from the motion picture "Toy Story": Sid was the boy next door who destroyed toys. Sid is also considered by many to stand for "Still In Development", a possible backronym.
Originally, sid was the separate directory in which binary packages for unreleased architectures were placed. This layout became confusing and problematic when those unreleased architectures were then released, so it was changed to the current setup.
The advantage of using the unstable distribution is that it contains the latest bleeding edge software for Debian. However, this software is very untested so the unstable distribution can be buggy and otherwise problematic.
Compare: stable, frozen, testing, unstable; buzz, rex, bo, hamm, slink, potato, woody, sarge