Each hole you place in the hull is a potential leaking point. When you are nailing the topside planks together, you are basically asking for one of the hundreds of holes to leak! To avoid this from happening, copious amounts of bedding compound are used to seal up any voids and keep out any water that may try to work its way in.
While the board is placed over a smearing of polysulfide bedding compound, the nail needs a bit of help as well. The nail hole is drilled smaller than the nail itself that way the wood will swell and squeeze onto the nail, keeping out any water.
When the board is placed on the hull, excess polysulfide will ooze out from between the seams. This is basically wasted material, unless you can use it for something else! Dipping the nail in the material will help put some bedding compound on the nail to seal up the hole even further.
The polysulfide will be transferred to the hole where it will form a seal around the head of the nail and the board.
The bedding compound will ooze out of the hole as the nail passes through, giving the entire nail a light coating as it is driven through.
When the nail is driven in all the way, the bedding compound will smear all around the head of the nail, sealing the nail off and (hopefully) keep any water from seeping through.
