OSL (Open Shading Language) is an open source language designed for creating materials, lights, etc. The ability to add custom OSL scripts for rendering with Cycles was added to blender in 2.65

From the OSL Introduction page:

Open Shading Language (OSL) is a small but rich language for programmable shading in advanced renderers and other applications, ideal for describing materials, lights, displacement, and pattern generation.

OSL was developed by Sony Pictures Imageworks for use in its in-house renderer used for feature film animation and visual effects. The language specification was developed with input by other visual effects and animation studios who also wish to use it.

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