Searched the forum but could not come up with the true meaning of the word "optified". I have seen it been used here every now and then. Used google search and , of course, the word is only been used in the maemo community. So, what does the word "optified" means?

I believe it means application files are stored in /home/opt (which is on a different, much larger partition than rootfs).

Thus, optified applications when installed won't have a likely chance of filling up rootfs and rendering the device inoperable.

here's a detailed explanation:
http://wiki.maemo.org/Opt_Problem

...and in short terms - "optified" is an art term used in the developer scene for "optimized/minified" code -> "optified".

Would it of made more sense to mount the filesystem similar to http://www.linux-live.org/

The root image is usually a compressed read-only filesystem. The writable part is a loopback filesystem (e.g. 2gb ext3/xfs filename.dat) overlayed over read-only system.

I currently run linux on my laptop this way. My linux installation exists on a USB stick and a loopback file is present on the harddrive ( I also have to use Windows)

Not really.. /opt has existed on some *nix operating systems for years. It means 'Optional', i.e. where 3party apps were typically installed. So, in this sense 'optified' just means 'set up to install in /opt'.

Some Linux distros use it too (e.g. SuSE), and it's always been annoying and a hassle. It's done a bit differently on Maemo (to make it more transparent). And it could have been done better there too, but for now we're living with 'optifying'.