'Liquid Sandpaper' as it is more commonly known, is a chemical solution that removes the thin top layers of the surface of a glossy painted surface.
As you wipe it around it matt's the glossy surface, making it easier to be repainted without having to be sanded down, and is great for keying a glossy surface.

It does not actually do any sanding and only remove's the gloss from a painted surface, and if the surface has bumps or imperfections it will not smooth these.
Its more of a de-glosser, and an advantage is that because it is a solution, sanding dust is not created, which for such as lead paint its a health and saftey feature, though the clean-up afterwards can be messy resulting in additional work.

I've used it in the past on such as a fibreglass fus.