The way it works is pretty simple. As a borrower you register, provide basic information. Step 1 is to retrieve your FICO score via the Prosper site. Step 2 is to create a loan listing. Similar to Ebay in someways.
The lenders then bid on your loan. Typically, each loan is bid on and funded collectively by multiple bidders spreading the risk for the lender.
Think about it... you can earn returns of 10%-30% (as low as 3-5%) by removing the middleman and assuming the risk.
Now, how does it relate to Web 2.0, you may ask. Well, the key is to realize that one of the key factors helping you decide whether or not to lend money to a lender is by tapping on the wisdom of other fellow lenders (collaboration). The other minor feature is that Prosper retrieves the borrowers FICO score by leveraging 'web services'.
This start-up is unique and to me a clear example of room for ingenuity in business models.
Finally, how does Prosper make money? It charges 1% everytime a loan is matched. And there is a 0.5% fee on lenders for the amount of money they have in Prosper for lending.
Its simple, uses collective wisdom, relies on customers to create all content- I say this is a true blue Web 2.0 business (even though it may not be a Web 2.0 technology).
Here is another good review of Prosper at PureVC.