How are they ranked? On what basis are user's assigned to a particular tier?

Based on the ratings the users get from challenges, they're given ranks for the season. For season, the user falls into tier based on his rank.

For the current season, Seaside Season the tiers are as follows

tier 1 - COMMODORE - ranks 1-10
tier 2- FIRST MATE - ranks 11-25 and so on

This informations is shown to users on the tiers for seasons (1st tab in the consolidated popup).