Link decay is when you lose links and the speed which you do so. If you are losing links, it may be a sign that your site isn't very good and/or you are using link spamming techniques.

If you think about it, it makes sense. Why would a site lose links at a faster rate than "normal" for that niche?

Here's a link to an article about patents filed by the SEs concerning link decay and link spam:
http://www.huomah.com/Search-Engines/Search-Engine-Optimization/Link-Builders-Guide-to-Historical-Ranking-Factors.html

Another:
http://www.huomah.com/Search-Engines/Search-Engine-Optimization/Spam-detection-using-historical-factors.html

Using BlogBomb only for your links and having them be totally dynamic may actually hurt your rankings, as a link is here one day, and gone the next.

But if you use ZZ Tuel and/or Godfather (both drawing from Blogbomb), each of them creates a static html page, with the RSS links now becoming permanent.

Is it link decay theory? Yes. But both Yahoo and Microsoft have filed patents relating to link decay. Google has similar concepts.

So we know the engines are aware of the concept. I think it would be easy to keep track of the increase/decrease of linking over time, and the concept of link velocity and link decay make sense.