It's the name you plan to use when someone asks you for the address of your web site; the "official" name. This would typically be something like www.example.com, and must be one of the aliases that is associated with your site (this can include the default alias ending in .nfshost.com).
Note that if you are running software on your site that lets you designate the official URL for the site (such as WordPress), you'll need to update that information before you set a hard canonical name that is different from the hostname you have configured for your site. (To continue with the WordPress example, the "blog URI" or "WordPress address (URL)" is the setting in question.) If you don't, you'll probably create a redirect loop and your site won't load anymore. Switch the canonical type back to "off" to let your site load and regain access to your software's administration area.
For more information on this subject, see this FAQ entry.
For more information on aliases, see this FAQ entry.