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The Camouflage skill effects how easily you blend into cover when squatting or prone, making you harder to spot at higher skills levels.
Leveling is done simply by squatting or going prone while in cover. The action of going prone repeatedly increases your skill points at higher rate, rather than just lying still, which only gives one point at a time.
The camouflage system in scum makes players disappear from view, similar to how you can not see players around corners in 3rd person view. The camouflage skill level is the largest factor in negating an enemies skill in awaremess. Camouflage clothing matching the environment will aid in this, as will movement speed and whether you are prone or crouched, and whether you are in a bush. Moving or turning will destroy your invisiblity, though crouch-walking through brush will keep you invisible at a distance with camouflage and high skill level.