Here's my understanding of the history (which I hope people like joshu correct if I'm wrong):
The site was awesome and popular pre-Yahoo, but also pretty overwhelming to run. Yahoo brought it with resources, scale, and sweet, sweet promises that they understood Web 2.0. Instead, they quickly moved Joshua to a position where he couldn't really steer the product, and got sidetracked into redesigns and time sinks like integrating Yahoo ID as logins. The original, ambitious plan (integrate Delicious as a signal into Yahoo search, and make it unbeatable in real-time trending topics) was lost to management paralysis.
Yahoo disastrously announced it would 'sunset' the site before actually having a plan for it, so in winter 2010 a large number of people jumped ship. Sites like mine (Pinboard) benefitted a lot, Delicious was crippled.
The new owners at AVOS seem to have had a grandiose idea that they would repeat their YouTube-scale success, and rewrote the site accordingly, to serve billions. The handoff from Yahoo was one of data, not code (since things were written to run on Yahoo's platform) and required users to opt in. This hemmorhaged users further, while AVOS engineers wrote a bloated and ambitious Delicious clone.
But the biggest mistake was when AVOS turned off some features beloved by a core Delicious constituency, fanfic authors. In particular, they made it impossible to search on the "/" character in tags, which instantly rendered a lot of the elaborate fanfic tagging and classification scheme useless. In my mind, that's when Delicious hit the point of no return.
AVOS failed through some combination of founder grandiosity and short attention span. They managed to get the worst of all worlds—high spam, low revenue, and a $40K a month AWS bill. They sold to Science Inc., a bunch of LA tech bros who WROTE EMAIL IN ALL CAPS and owned a bizarre collection of other online apps.
When they tired of it, they sold it to Tony Aly, an SEO specialist who wanted to try his hand on a bigger project, but eventually found himself overwhelmed by the support and operational burden. At that point, he sold it to me, and I parked it on a couple of expensive servers and made it read-only.
To the question "what happened", I think the best answer is that Yahoo killed the site by neglect. AVOS took it past the point of no return by making it bloated, slow, and antagonizing the last remaining group of core users. None of its acquirers ever understood what it was for.
Except me. I understand you, Delicious! But I also compete with you. No more tears now, only dreams.
I think Delicious had died before AVOS even touched them.