What's the difference between a blog on a subdomain and having your blog on your main domain.
Your Blog On A Subdomain
Subdomains count as unique URLs, to an extent, with the search engines. [Ed.: Google recently announced it will report subdomain links as internal links of the main domain; it is unclear at this point whether Google will apply this treatment to its algorithms as well] When you launch a subdomain you have to build up it's authority, PR and everything else pretty much from scratch. You can use it to create an extension of your site's main theme without messing up its categorization in the SE's indexes, and you can use a subdomain to boost up other pages within the website and main URL. Another reason to have your blog exist on a subdomain is if you are planning on having multiple blogs or multiple sites with multiple themes.
The subdomain allows your main URL to remain consistent within it's categorization and indexing, while the subdomains can build up their authority and classify themselves as extentions, as well as add your site to new categories with less damage to the main URL. One other advantage to using subdomains is that you can build up the authority and use that to juice up other pages within the main URL.
The downside to having a subdomain blog is that you are starting from scratch without any authority. It is also bad for branding because if you tell people that your blog is at blog.yourdomain.com, many times they will type in http://www.blog.yourdomain.com and not find it. It becomes annoying for them and they don't go to it. You can try to tell people to click from the homepage, but that sounds like extra work with multiple steps and who wants to do that?
Your Blog On Your Main Domain
This is what I normally prefer, unless you have multiple blogs and categories. The reason I prefer to have blogs on the main URL, only when the theme is similar in content to the main site, is that it adds fresh content and authority to the main URL. By adding in content, optimizing posts for specific keywords and phrases, as well as building a stronger internal linking structure from the blog, you can really solidify your rankings and categorization and take over the SERPs. Especially since Google is now letting you have multiple listings for a search term.
The downside to having a blog on your main URL, in my opinion, is that if you write about numerous topics, even if they are related, you may confuse the search engines and start to lower yourself in the SERPs. If you don't have a ton of authority on your base URL, in your categories through your site map and within the SEs, a strong internal linking structure and have your site structure in perfect condition, you could end up hurting your chance for ranking for your high traffic high conversion terms and have to work twice as hard to get and keep them.
Having a blog on your subdomain is great if you are writing about multiple topics, have multiple themes or want to build out a new topic and juice up your main domain. Having your blog as part of your main domain is great if you will consistently stay on topic because it builds up your authority and it can let you keep feeding the SEs new content regularly. It also enables you to keep your domain's authority to more easily begin to optimize more pages for more keywords. Both are great options, you just have to think about what the goal and content of the blog is before you choose one.