yes, it's a test build which is compiled every night (Hence the name).
All the changes (good or bad, it could create lots of bugs) applied the last 24hours by all the developers are compiled and a new version is released to users.
It's mainly for developers, to test the very last addition, bug fix, etc.
I'm using it to test my add-on and see if it's still working. I had to update it when they released firefox4, hopefully I had a lot of time between the nightly release of firefox4 and the official release to work on my add-on and fix it correctly. Now the official releases are coming too fast, I wouldn't have time to fix it in time.
But since then it's working without the need to update the code. I hope it will continue to be compatible without me working on it, I currently don't have time to release a new version.
http://nightly.mozilla.org/