how to use hook_field_widget_form
The hook is called by the Fields Widget API in order to collect information about defined widgets. Any module can define a field widget as long as it implements the necessary hooks.

Documentation about the hook itself can be found in the docs: hook_field_widget_form().

Basically it provides widget specific Form API elements that collect the necessary data for a field. The default values are set in code (or wherever the module chose to define them) and should provide sensible defaults. In the case of the Addressfield module the default values are defined in the function addressfield_default_values in the main module file addressfield.module.