[chc]

No, it is not optional to upgrade — at least not in the usual sense of the word. If you upgrade, you lose the ability to run Linux. If you don't upgrade, you lose the ability to play games. That's more like an ultimatum than a traditional optional install.

[chrischen]

You can still play games... Just not online, which is a free service anyways.

[dmm]

Several PSN games will not work without the PSN, even while playing single-player.

EDIT: Also new games will not work without upgrading.