nss-myhostname is a GNU libc NSS module that statically translates the local host name to the IP address 127.0.0.2 (which is on the loopback device) and vice versa.
This is useful to make sure that the local host name is always resolvable. Some programs (such as sudo) require this functionality.
Especially on embedded systems it may not be desirable to modify /etc/hosts to match the current host name.
It is a good idea to put this module as last resort in /etc/nsswitch.conf, to make sure that other name service take precedence.