^ I tried the unlock and it didn't ask me for the iPad's firmware. I think redsn0w is just downloading the baseband, so you can let it finish.
@heman110: You should go to 4.1 because your iPod model is more powerful and can support all the features of 4.0 without any lag (including newer more demanding games). The things you hear with MB and MC models don't apply to you, only to people with 2g iPod touches (MB) and those with 3g 8gb iPod touches (MC). Your exact iPod model is tethered on 4.2.1, but it's untethered on 4.1. I think Apple is still signing 4.1 SHSH blobs, which means you can update straight to 4.1 through iTunes. There are two methods that are being worked on to untether all models on 4.2: one that uses 4.2b3 SHSH blobs (and uses no exploit) and one with an all new exploit that is being developped by Comex. He says it should come out by Christmas, but it won't necessarily be Greenpois0n.
Also, tethered means that you have to rejailbreak your iPod everytime you turn it off, otherwise you just get stuck at the Apple logo.
Edit: I think that if Apple is still signing 4.1 SHSH blobs (not sure), you have to save them with Tiny Umbrella and use it in conjunction with iTunes to update.
Edit 2: Apparently, Apple is only signing 4.1 updates on 2g iPod touches and 3g iPhones. So unless you want a tethered jailbreak, I suggest you wait until a new jailbreak is released and stay on 3.1.3 for now.
