The firmware has an inbuilt emulator so to speak.
In old times, we had to convert PS1 games to a format the PSP reads and load it with popsloader; the PS1 emulator differs from each PSP firmware and some converted games only work on some firmwares so there isn't a need to change firmware with popsloader.
Now that most (read: popular) games are on PSN, you can either go legit and buy them or pirate them, they work 100% if you go legit or pirate and without the need for popsloader.
If you want to play a game that isn't on PSN, you must convert it. There's a guide somewhere in the
tutorial section, I think.