The Watch is arguably one of the Items that has influenced the world the most. It's abilities have yet to be discovered, there are no obvious passive effects of The Watch.
A man named Friedrich Yahn reverse engineered it to create the technology known as Clockwork. Although it is not clear how any of the Items came into existence, it is specifically The Watch's origins that are the most mysterious as it's technology had never before been encountered, while all other Items have counterparts in the world.
The Watch, like all of the Items, cannot be damaged or disassembled so the only way that Friedrich could have possibly reverse engineered it would have been while in The Lost Room. How Friedrich was able to enter The Lost Room to do this remains a mystery.