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Elo is based off of Microsoft's Chess matchmaking system with some modifications, if I remember correctly. Basically, winning or losing ranked games adds to or subtracts from your elo, with the idea that you will eventually play enough games to average your elo out to your true rank. There's some other stuff too, like not playing a ranked game for a couple of weeks causing elo decay and you gaining or losing more elo with your initial games.
Edit: Ah, beaten to it.
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