droste.zip is a ZIP file that contains an exact copy of itself.
This page used to have an interactive explanation, but I lost it. Try wgreenberg's version, or read Russ Cox's explanation from 2010.
I have a weak spot for compression hacks. Here are two good ones:
"Rosetta Flash" An alphanumeric string that is also a valid compressed Flash file.
Encoding Web Shells in PNG IDAT chunks An image file that doesn't have HTML in it, but does after you PNG-compress it.