We all know what Viral Marketing is - hilariously explained by Wondertonic. The goal of viral marketing is to create spontaneous word of mouth advertising (we all have our own definition, I pulled mine from Wikipedia).
Viral Expansion Loops take viral marketing one step further, because they routinely replicate the effects of viral marketing. It is sustained viral marketing. The viral expansion loop is when a human participates in something that cannot, in itself, be sustained without participants. For example, trading Beanie Babies in the late 90s is a viral expansion loop. People were trading toys that could be bought for $5 and resold for hundreds. There was no hard value there (they were not made of gold) but the popularity of the toy created a viral expansion loop. People buying the toys then trading them would complete the loop.
A more realistic example of a viral expansion loop is the social network. Joel mentions Ning, a software company that allows users to create their own social networks. The value created in a social network is the participation of more users sharing their ideas. This draws more users in and completes a revolution of the loop. The added users will bring more ideas to the social network, which opens up the possibility for even more users to join.
The viral expansion loop is a powerful thing. It is principle behind the rapid growth of content on the internet.