It is a create your own store product. People would have simply been making a store and then using software to spam their links everywhere. I think sub domains are usually treated as separate domains though?
If all the subdomains had links back to zilo (say the header or footer), it starts to look like a huge link farm, or a bunch of satellite sites. It's actually pretty dangerous. But disavow is here, right? hah
It is possible that on that fateful day, Google noticed zlio is user generated sub domains, and lost power.