If I recall, the theory was that wrapping your 360 in a towel and turning it on would heat it up so much that whatever microfractures in solder joints that may have been causing the RROD problem would temporarily bond together again and make your Xbox usable for a time.

It issue was with brittle solder on the boards and wrapping it in a towel and turning it on would allow it to get hot enough to (hopefully) re-flow broken connections.

The towel insulated the Xbox and remelted the BGA.

If you let it run wrapped in a towel it would sometimes temporarily fix it