Valve has decided that it wants Team Fortress 2 players to submit designs for game items and avatars, and the player created content just might be placed in the game - if it's good enough and conforms to the rules.
Pending Valve's approval, the item will get added to your backpack, and as random item drops in-game. This will allow you and other players to "blow up stuff using a weapon you created", "kill an enemy, then let him know he died in a hat you designed" and all other sorts of fun stuff.
The contribute feature is exclusively for model design and not for buff purposes. So weapons, hats, avatars will be incorporated into the gameplay in a way that makes the most sense for TF2. Should your creation show up in game, yours will be the most spectacular version, that way you can prove to other players it was you who created it.
Community-created avatars and items will be displayed in an online image gallery, allowing you view and add comments to the items and avatars you and others have gotten approved.
Valve plans to "roll out the gallery as the submissions come in", so it shan't be long before loads of stuff starts pouring in.
The complete list of rules and requirements can be found through here.