Wood smoke contains a lot of acidic tar. A tar condenser is a bit like a bottle trap, in which the heavier tarry compounds collect, leaving the sweeter, more volatile aromatics in the smoke to flavour the food. I use one as much to get some of the water vapour out of the smoke so that the humidity in the smoker doesn't get too high as for it's tar removing. It also helps ensure the smoke is at ambient temperature.
The pipe goes in through the top of the red fuel container and is taken down to the bottom in a pipe inside, then works its way back up to the top before exiting out to the smoker.
Dave