Shrouding came with Depths of Darkhollow as a way to lower your level in the form of a selected monster.
I.E. You can shroud down to a 25 wizard to group with fellow lowbies.
The levels you can shroud to are in increments of 5 (as in 5/10/15/20/25, etc.)
The shrouds can be used and leveled up to unlock more shrouds.... they are in classifications (such as undead/animal).
They can also be used to save buffs while you sit in PoK. (Get buffs, shroud, and sit). They may seem useful, but other than grouping with new characters and maybe the kobold rogue for feign death/sneak/hide and the fairy enchanter for charm for quest, they hold no real useable value that I have found.