To provide a bit of an international perspective...
That's an overpressure valve on a French water heater, it's in a different place but it's basically the same stuff.
When the water is heated, pressure increases, so the valve releases a little bit of water which drips down along the tip in the center, into the white plastic drain (this is also a u-bend so it doesn't smell).
The important thing is the large hole between the drain and the overpressure valve. The part with the hole is integrated with the valve and cannot be removed, because its purpose is to make sure no-one will screw a small pipe there, or anything else that couldn't handle the full flow in case a failure happens and the valve has to vent quickly.
So in normal use, a little bit of water drips into the drain when it heats. If the thermostat welds itself close and the heater heats non-stop until the water boils, then the valve opens and has to vent all the water quickly. If the drain can take the flow, it will go into the drain, but if not, it's better to have a spill than an exploding water heater.
So... don't plug this valve... and if you put a drain under it, make sure to leave some space. Never connect it directly to the drain with watertight fittings, otherwise if it vents, it will send pressurized water into the drain, which is not rated for pressure so pipes will break, and you'll still have a spill, but it'll be brown water...