The On-Board Effects Loop (OBEL) is an innovation developed by Jerry Garcia, beginning in the late 1970s and used on all of his guitars from that point on... It's function is to bring consistency to the way effects sound and behave regardless of the guitar's master volume setting and to eliminate the tone loss from long cable runs.
As anyone who uses effects knows, the effects behave, and sound differently depending on how high, or low, the guitar's volume is set. Sometimes this is to your favor, but more times than not, it's at least a pain, and at worst just doesn't sound good when the guitar is played at lower settings.
With the OBEL, the signal from the pickups, after the coil switches (if used) and the pickup selector switch (where the signal normally goes to the main volume pot) is routed through a buffer/preamp where the signal, at full strength from the pickups, is converted to low impedance, sent out of the guitar to the Effects array, returned to the guitar, sent through the guitar's master volume pot, and then, as normal, out to the amplifier.
With this signal path, the guitar presents the effects with the same full strength signal at all times, and so is always consistent; the volume being adjusted at the end of the chain, just before going to the amp.
This system, as you might guess, requires a different cable setup as well, usually consisting of a mono cable and a stereo cable jacketed together as one cable... so you have the stereo cable taking the signal from the guitar to the effects and back again, and the mono cable going to the amplifier as usual... Typically I use a breakout box set up with the pedals to accomplish the interface from the guitar... you can see these on the accessories page.
There are various cable, connection, and breakout possibilities... please contact me if you have questions.