Not totally sure as I'm still waiting for mine , however I believe it's what you press before you submerge your Watch in water , say when you're starting your swim. I believe it stops the Watch face detecting any other touch , other than the actual water/workout.
Nothing bad would happen if you didn't do this. All this essentially does is locks the screen from getting funny inputs from the water surrounding it. If you ever forget to set it don't panic. You can manually run the eject water mode at any time as well.