Physfs is short for PhysicsFS. It's a C library that provides abstract access to various archives. It is intended for use in video games, and the design was somewhat inspired by Quake 3's file subsystem.
The programmer defines a "write directory" on the physical filesystem to which all writing through the PhysicsFS is restricted for security reasons.
PhysicsFS gives you platform-abstracted means to determine if CD-ROMs are available, the user's home directory (where in the real filesystem your game is running), etc.