EmuNand is short for 'Emulated Nand'. When you turn on your 3DS, it boots up the 3DS operating system. This OS is stored on the 3DS nand, which we call SysNand (System Nand). This OS must be at version 4-4.5 in order for Gateway to work. But being the smart folks that they are, they created a neat trick:
What if you made a copy of the OS and booted that inside your original OS. Imagine on your computer, if you could open a window and boot a new OS inside it (actually, this is pretty easy to do, and people do it a lot). Like an OS inside an OS. This is a similar kind of thing.
When you create EmuNand with gateway, it opens up a new OS (which is stored on your SD card). Your old OS is still running, but it's in the background. Since the new OS is emulated, you can update it, change it, delete it, make a new one - anything you want, because essentially it's running as an application within your original OS. In other words, it's disposable. Gateway already has access to all the important bits of the 3DS, because your original OS gave it access, so it's not a problem if the EmuNand is updated to the latest firmware.
Note that creating EmuNand is optional. Since Gateway runs on your original OS, it is more than capable of running games there too. If you do go the EmuNand route, then do plenty of reading and follow guides EXACTLY. One mistake and you could end up updating your SysNand instead of the EmuNand...and then you'll cry.