From my understanding it's a way to circulate water which takes up less space and eliminates the need for bulky/ugly looking powerheads.
Most people will have several holes drilled in their tank and then the return pump or a sepearate pump will flow through them to have more directions of flow.... a lot of people will use a sqwd device which varies the amount of flow to each output causing a wave pattern which similates the waves on real reefs.
Try doing a search on it and look at some peoples tank setup threads.
Closed loop adds circulation to your tank. Powerheads are another way to go. A closed loop is run by pump external to the tank. I elected to do a closed loop to allow me to run multiple outlets from a single pump and avoid power heads. However it does require plumbing. I have an undrilled tank so I go over the top of the tank.
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