Go into settings -> about phone, to see what ROM you have. Assuming you got the phone new and haven't rooted it to install a new ROM you'll have either 1.5 or 1.6.
Installing a different ROM can add new features or just let you runa newer version of android. I run cyanogenmod ROM on my Magic my brother runs a android version 2.0 ROM on his Magic.
The benefits?
Newer software/features
Features not available on normal ROM, e.g. USB tether to a computer running any OS (windoze, Mac, Linux)
Risks?
If you balls up the process you can brick your phone and void your warranty