You may have experience on enter the recovery mode by turning on the phone by holding the Home key and End key (red one) and then press Alt + L, right? But who know what these things did with your phone actually?
OK, I will make your clear in this point.
Alt + W :
W means for Wipe Data. This will delete your current settings but do not touch your firmware even bit. It will reset everything, for example, APN settings, gmail account, Contacts, etc. You have to set them all by yourselves after you did it. In technical, it will delete some files in /data directory. So, if your phone have problems about system firmware, this choice is not your hero.
Alt + S :
This will make change in /system directory. There are 2 choices depend on update.zip placed in your SD Card. First is re-flash whole directory, which we called Full Update. It will format /system directory and copy all files in update.zip back to /system. Even the file for this is quite big (around 45 MB) but this way is the cleanest method. Second is to apply patch, it will modify your current /system using patch embedded in update.zip. Its purpose is to update from old version to new one. Please note that Alt+S choice will NOT touch your settings, so you will be able to continue your phone usage after you did it without re-settings anything.
I suggest you to download and keep update.zip in your sdcard all the time. This will help you recovery your phone in EVERY cases. So your G1 will be your G1 as long as possible. 🙂