What exactly does “Posts page” do in WordPress?

Hay, I’m making a WordPress template, and i have 4 main pages.

HOME
BLOG
CONTACT
ABOUT US

As you can see “Blog” is a page (i need it to display when i call wp_list_pages()), but how do i edit this blog page? I assigned the “Blog” page a custom temeplate (called blog.php), but when “Blog” is set as the “Post page” in the Reading section of the WordPress admin, the page fails to render the template.

How do i edit this “Blog” page?

Setting page to be “posts page” changes its template hierarchy to follow home page rules.

So your custom template is ignored and it looks for home.php or index.php, which might or might not be the reason it fails to render.