MTD (Memory Technology Device) is a type of Partition Map (configuration of partitions of NAND).
Partition Map allows those who are using it control over how their partitions are sized and how much space is allocated here and how much space is taken away from there. A file system resides on the Partition Map and governs the data being read,wrote,moved etc by the OS (Android). Changing a file system of a partition is very easy, but changing overall Partition Mapping isn't. Plus, partition mapping decides which file system to support. So, its choice is very important.
MTD is Open Source. MTD supports YAFFS2 as a file system residing on it governing how data is transferred and the speed of which it is done. EXT2 through 4 aren't possible with MTD. Due to Open Source nature, it gives you full control over partitions. Choose MTD if you use CyanogenMod or MIUI type custom ROMs.
A Bit of Knowledge: Samsung's stock ROM uses BML partition map. BML is proprietary in nature. It's Close Source.