Everyone needs sleep to stay sharp and function well. Here the game stretches realism quite a bit to enhance playability, but your character will still need some sleep to keep going. For every hour of real time continuous play, you can expect to spend four or five minutes sleeping. As your character tires, she will begin to lose effectiveness. Her reactions may be slower and her normal combat bonuses and stats will begin to diminish.
The rate of fatigue will be affected chiefly by what your character is doing. Engaging in combat is much more tiring than standing around talking. Sitting down and resting will help you recover somewhat, but will not be a full substitute for sleep.
The features are intended to enhance game-play. Consider the following situations:
First, a group of trolloc players raid a small village in the borderlands. Eventually some border guard players hear of this and move to attack them. If the trollocs have not been careful, they may be very tired when the humans arrive, making their combat less effective or even collapsing during a retreat back to the blight. Likewise for an adventurer entering a mob infested area. If many aggressive mobs are about, he must be careful to avoid overtiring. Strategy and planning are involved in both cases.