What is the word verification option?

The "word verification" option can be found on the Settings | Comments tab for your blog, and it looks like this:
If you choose "yes" for this setting, then people leaving comments on your blog will be required to complete a word verification step, similar to the one presented when you create a blog:
What this does is to prevent automated systems from adding comments to your blog, since it takes a human being to read the word and pass this step. If you've ever received a comment that looked like an advertisement or a random link to an unrelated site, then you've encountered comment spam. A lot of this is done automatically by software which can't pass the word verification, so enabling this option is a good way to prevent many such unwanted comments.