Cloak is used to hide your IP address from other users on the IRC network. It is advised you set up your cloak for better privacy and as recently popular - to avoid a possible DDOS attack on your connection after joining the channel.
Note: As with most tekmology, you need to use it right. In a common misconfiguration IRC client will rejoin a channel on reconnect before cloak is effective and thus render it useless by revealing your host (plus you spam the chan). Make sure your configuration will not exhibit such behaviour.
You can get your cloak free of charge by joining #freenode and politely asking the staff.
- Can I get a hostname cloak? https://freenode.net/faq.shtml#cloaks
- Why is my cloak not applied initially when I auto-join channels? https://freenode.net/faq.shtml#nocloakonjoin