Can somebody tell me how I am supposed to be using blogs.dir for network / MU sites?

Question

I think blogs.dir is supposed to be used to separate content for the different blogs on a network install of Wordpress (MU or 3.0+ with networks enabled), however, I've not been able to find a clear guide to using it. Can someone shed some light and maybe post a few links to information on how to set it up, what to put in there, what the permissions should be set to, etc. ?