What is the wix 'KeyPath' attribute?

As explained by Rob Mensching:

The KeyPath for a Component is a single resource that the Windows Installer uses to determine if a Component "exists" on a machine.

This means that when Windows Installer decides whether to install your component, it will first look whether the keypath resource is already present. If it is, none of the resources in the component are installed.

The presence of the keypath resource also determines whether a component has been damaged or has gone missing when you "repair" an MSI.

When the keypath resource is a versioned file, Windows Installer will consider it to exist only if it finds a file with an equal or higher version.

In your specific example, you have a component which removes a folder on uninstallation. This component will only be installed if the given registry key does not yet exists. Adding a registry key to use as the key path is a common trick when you need a keypath for a component that installs resources that cannot be used as a keypath themselves, like a shortcut.