The Applications Palette lets you quickly see and switch between running applications, letting you hide ones you aren’t interested in. You can control click to get a variety of options. And you can turn it off in the Keyboard Maestro General Preferences.
It is a relatively recent addition to Keyboard Maestro, and in part it is there for those folks who used DragThing and are missing it as it did not survive the transition to 64-bit. And since I am one of those folks, that probably explains it.
As for why it is on by default, well, if it wasn’t, you probably would never find it.
The Application Switcher replacement has much more history. Keyboard Maestro actually grew out of a program called Application Switcher for Classic Mac OS, both written by Michael Kamprath. So in some respects, replacing the Application Switcher is more core to Keyboard Maestro than macros are, though only from a historical point of view.
As for why it is better, one difference is you can move backwards with just the Shift key instead of Shift-Tab, it has a bunch of features that you can get to by clicking and holding, including showing recently quit application, as well as control over excluding applications and always showing application. It has a variety of styles which you can adjust in the Activate Application Switcher action in the macro which invokes it which is in the Switcher Group.