Exploiting is when you're using some mechanic that works in a way other than intended to give yourself a significant advantage that you weren't meant to have.
For instance, using a blood rose potion, doing a quicksave then quickload, and repeating until you have 100+ in all stats. The potion isn't supposed to give you extra stats each time you save/load, but it does. The ability to pick up barrels and crates weren't meant to give the player the ability to wall off enemy paths, as is evident by the AI's inability to deal with it, but you can do it. Fleeing wasn't meant to allow you to kill 1 guy, teleport away from any situation at the click of a button, go rest up, come back, and repeat until all enemies dead, but it does. I don't have any experience with sneaking exploits, so I can't say anything about that.
Many people would consider using an exploit to be cheating, but that's a matter of perspective. I think most people would only consider something to be cheating if they were using something outside the realm of features intended to be used in normal play, thereby clearly separating exploits from cheats.
I'd hoped that my rules for the challenge would prevent people from using already-known exploits, and instead we'd discover other things that should be addressed before release. I think the game is more fun for people if they can't just use some exploit to get past obstacles.
