What does "Make Key Photo" do in Mac Photos App?

Which version of Photos do you have?

In Photos 4.0 you can select key photos for albums, but not smart albums. You can set a key photo for faces albums and a key frame for videos or Live Photos. Other than iPhoto there are no events. The events you created in iPhoto have been migrated as albums.

When you are viewing the list of albums in the sidebar or in Album view, the key photo will be used as the thumbnail. You make a photo a key photo by selecting it in the album while viewing the album. Ctrl-click the photo and use the command "Make Key Photo".

Back in the days of iPhoto (the predecessor to the current Photos app), photos would be arranged into albums based on when they were taken, much like Moments are today. These events would appear as squares represented by a single photo, and mousing over the event would cause thumbnails from within the event to rapidly scroll through the event icon. If you moved the mouse away from the event icon, it would revert to displaying the key photo, which was a default chosen by the computer. If you didn't like the one the computer chose to show, you could set the key photo while mousing over the event by stopping when it showed a thumbnail you liked, and then secondary-clicking and choosing "Make Key Photo."

The closest you can get to this kind of behaviour is when viewing albums in Photos. Again, as you mouse over the album, you'll see thumbnails of the images inside fly by. Unlike iPhoto, however, you can't choose the key photo which is shown by default. I hope this answers your question.