Silverlight 3 Assembly Caching feature makes XAP files much smaller, which can dramatically reduce download for your existing Silverlight 3 application users, resulting in much better user experience even if code is constantly evolving.
Assembly caching is practically collection of zip files holding third party or any other dlls that is downloaded to client's machine on Silverlight application start and saved in browser's cache via browser's cache mechanism.
Silverlight 3 Assembly Caching is not available in OOB scenarios and when external dlls are needed only on user's request.