This section should also have been filled in by the sys admin who did the deployment of your instance. If it has not been done please send him to the ofn-install wiki.
Your sys admin (alongside with you maybe!) will have to choose whether to use Amazon S3 or some other storage for your images. Not using S3 can be problematic as a big user might create disk shortage errors and hence server failures. Then you need to buy more HDD on the hosting server which would be more expensive than S3. We believe it is better (and best practice) to use an external server for images and S3 is cheap and already configured.
We know it's Amazon, so not the best data friendly company... but we store only images for now. We would like to find a more data-friendly option.